Sugar Market Report for 11 March

Good morning,

An inside day seen yesterday after prices recovered after the sharp losses the previous session aided by he new that Brazil’s Petrobras will increase gasoline and diesel prices. The market had opened 8-9 points firmer before dipping slightly as the lows of the day were posted just above unchanged. The market then improved slightly before slipping back. However, prices suddenly steamed higher as the Petrobras price increase was announced gaining over 50 points over the next 30 minutes to hit highs of day. Once the initial panic buying was concluded prices started to gradually ease back over the remainder of the session culminating is settling at the bottom end of the day’s range. Despite the likelihood of less sugar being produced in favour of ethanol the structure remained weak with KN just 2 points firmer at +4 while the NV finished 5 points firmer at -10 suggesting that the market remains well supplied due to Indian exports in the medium term. In London the spreads eased with the KQ down nearly $1 at +9.80 as was the QV at +6.80. This meant the WP also slipped lower with KK WP ending at 106.40 and the VV WP at 88.50. Interest remained limited with no block trades registered. The market spent the morning digesting the huge crude sell-off the previous session before the Petrobras news sparked a short covering rally. However, the initial enthusiasm soon waned. Nevertheless, the market remain at the top end of the recent range with the macro still dominating proceedings.

As mentioned above Brazil’s oil company Petrobras announced yesterday that they will raise fuel prices at the refinery gate as of today. Gasoline prices will rise 18.8% to 3.86 reais per litre while diesel will jump 24.9% to 4.51 reais per litre. Some increase had been expected given the huge rise in world crude prices due to the Ukraine conflict. However, the Brazilian President, Jair Bolsonaro, has been particularly vocal about any large rises in fuel probably mindful of inflation fears and the October Presidential election. These rises still mean domestic fuel prices are still some 20% below parallel rate in global markets. It is unlikely further increases will be seen unless crude prices improve significantly for current levels. Additionally, the Brazilian Senate approved a couple of bills aimed at curbing these fuel increases at the pumps with subsidies and tax exemptions. One bill will put a price ceiling to consumers. If international prices rise above a certain level the government would step in to compensate distributers. It would be funded from several sources according officials including the dividend the government receives from Petrobras. The proposal also creates a motor fuel assistance programme aimed at families with an income of less than three times Brazil’s minimum wage plus assistance for self-employed drivers and truckers. The increases in fuel costs will, undoubtably, mean ethanol prices will rise and this, in turn, should mean more sugar cane being diverted to ethanol production instead of sugar when the 2022/23 harvest starts next month. Needless to say the extent of the shift will only be know in the weeks ahead and will vary throughout the season depending on various factors not least crude prices. So far a couple of analysts have suggested the shift could see 1.2 -2.5 million tonnes of sugar lost to ethanol production. However, it is estimated mills have priced around 75% of their sugar production for the coming season. It would need a sizable drop in sugar prices for mills to be able to buy back or wash out trades which would seem unlikely.

This morning the market opened 2 points firmer thin volume. Currently, prices remain 2 points firmer. The KN and NV are both 1 point lower at +3 and -11 respectively in early trading. In early London trading the KQ is slightly weaker at +9.10 while the QV is also weaker at +7.10. The macro is mixed this morning with crude 1.5% higher while most gains/soya are lower with the exception of wheat. The USD Index is firmer while the BRL ended unchanged last night at 5.02. Sugar’s price direction will continue to be dictated by the prices of crude although the Petrobras price increases are now in the market. Seasonality charts suggest prices will start, around the second half of March, to weaken as the start of the Brazilian CS harvest comes into sight. This year things are significantly different and are likely to remain supportive. Therefore, sugar prices would seem unlikely to drop back below 18 cents but whether there is any compelling reason for prices to hit 20 cents is debateable although nothing can be ruled out as the Russian/Ukraine conflict continues to be played out.

Please note both sugar markets will close 1 hour earlier from Monday 14^th March for a fortnight as US day-light savings start before UK and European clocks go forward as well.