Weekly Sugar Wrap
Written by Howard Jenkins, Head of Global Commodities
The sugar markets has been quieter over the past week than earlier in the month as fund activity has dropped. Prices did try to improve again with another foray over 16 cents but this was fleeting with prices soon dropping back. Sentiment has not been helped by a negative macro picture as the USD improves and other markets come under pressure. The euphoria of effective multiple vaccines being approved to control the Covid pandemic has waned as the huge logistical problems of vaccinating the world become apparent. Arguments over supplies have increased as Governments bicker with each other. The huge economic damage that the pandemic has caused across the world is also beginning to sink in with many concerned that the equities markets are not taking into account the economic hardships that are to come. With limited fresh fundamental news around sugar has moved with the macro with prices now around 120 points off the 3 ½ year highs reached on the 14th January.
At this time of year there is, always, more conjecture and guessing being made by analysts and traders as to sugar production over the next nine months and whether this will result in a global surplus or deficit for the current season and, for that matter, the next. Brazil is in its ‘between harvest’ period with all mills closed and undergoing post-harvest maintenance. The 2021/22 harvest will start up again in April. Last season’s dry winter that allowed the harvest to be virtually uninterrupted is thought to have caused some damage to the cane but analysts are divided on how much. Some think the dry weather and fires will reduce the cane crop by over 20 million tonnes while other see a similar sized crop. Nevertheless, most see sugar production a priority over ethanol and another large production will be seen but, unlikely, to reach the record levels of last harvest. Of course ethanol prices will play a part in the amount of production but, currently, they would have to improve considerable.
The Indian harvest is in full swing with over 15 million tonnes of sugar produced so far. Again analysts’ estimates vary. ISMA said recently they see production at 30.2 million tonnes but many others see production above 32 million tonnes. There also appears little reason not to believe an even bigger cane crop will be harvested next year. India has brought forward their target to include 20% ethanol in their petrol by five years. Whether this can be achieved remains to be seen. The Thai harvest is also in top gear but sentiment is much more muted with sugar production still some 35% lower year-on year. The harvest started late as mills give the cane longer to improve but it is unlikely production will significantly catch up with last year’s disappointing yield. The EU, buoyed by the reinstatement of neonicotinoid pesticides for use in the short term for some members, may see an increase in the planted area as farmers have more confidence in growing beet but it is far too early for anything but guesses on production levels.
So an uncertain production picture. There is a similar dilemma on the consumption side. The pandemic continues to make it very difficult to predict whether there will be a sizable increase in global consumption. There are signs that it is picking up as consumers adapt to lock-downs and travel restrictions but whether it can regain the drop of last year and more remains to be seen. Therefore, it may be wise to conclude the market is relatively well-balanced at the moment with Indian sugar exports helping to plug gaps and that current prices are justified.
Needless to say, the funds will probably continue to dictate market prices in the short term. The last COT report showed the funds held just over 173k lots net long which they have probably trimmed further over the past few days. This gives them a lot of buying power if they decide to buy again. However, some suspect some funds may want to book their profits and look elsewhere to invest. Nevertheless, it would seem unlikely wholesale liquidation will be seen as many continue to see agricultural commodities as a good long term bet.
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