Sugar Market Report for 21 July

Good morning,

The market extended its losses yesterday after the big drop the previous session. However, the trading volume was abysmal at only 65.5k lots. The market had opened 3 points firmer before improving slightly. However, the gains were short lived and with the highs of the day in place prices soon started to fall. Some initial support was seen at the lows of the previous session but, eventually, the support was eroded and prices slipped further dropping through the 18.70 level and settling on the lows and at their lowest level since 7^th July. The VH improved 1 point to -18 while the HK finished unchanged at +72. In London it was equally as quiet with the structure continuing to weaken. The VZ ended at +19.20 and the ZH at +9.30. The WP also saw limited interest with the VV WP ending at 124.30 and the VZ at 105.10. It was probably not too much of a surprise the market continued to drop yesterday. The lowering of gasoline prices in Brazil coupled with fuel tax cuts have combined to encouraging Brazilian mills to concentrate on sugar production at the expense of ethanol. Archer Consulting reported that mills increased their pricing in June when prices rallied to over 20 cents. Add in a decent monsoon across India and chatter that the Indian government may allow more exports before the end of the season meant the sentiment remains bearish. Deeper global recession fears could hit demand late this year and next.

It was also reported yesterday that the Indian Government may allow an additional 1 – 1.2 million tonnes of sugar to be exported during the current season over and above the 10 million tonne cap they imposed in May. The possible decision is because mills have concluded export contracts before the cap was imposed and are now in danger of defaulting to the buyers which is, obviously, rather counter-productive. The news should not have any marked impact on prices after the recent falls. It was one reason the market rallied in May when analysts recalculated their S&D to take into account the export cap. Many had expected the Government to allow an extra 1 million tonnes of exports so as to stop any defaults. With the monsoon progressing well there is no reason to believe India will not produce a similar 36 million tonnes of sugar next season – 8-9 million tonnes more than their domestic demand.

This morning the market opened 3 points higher before improving further. However, prices are, currently, back to unchanged. The VH and HK are both 1 point lower at -19 and +71 respectively. In early London trading the VZ and ZH are both a tad lower at +19.190 and +9.10 respectively. This morning the macro is generally negative with crude lower, grains/soya mixed, metal lower and USD Index also lower after improving slightly yesterday. The BRL was weaker ending at 5.47 last night. The market may have done enough on the downside in the short term having absorbed a lot of bearish sentiment recently. Nevertheless, prices remain well above Brazilian ethanol parity so there is more potential for prices to drop. Unica will release their 1^st half July harvest data next week. The split and the ATR will be studied carefully as analysts continue to try to guess whether the CS has the ability to beat last season’s 32 million tonnes.