Weekly Sugar Wrap for 11 June

Since my last ‘Sugar Wrap’ at the end of last month the sugar market has remained range bound with prices caught within a 73 point range with selling noted as prices approach 18 cents but with support at below 17.30 from trade and end-user pricing. Today prices are, currently, trading in the middle of this range. The trading volumes have been lacklustre to say the least only boosted recently by the fund roll in font of the July expiry in 2 ½ weeks’ time. The structure of the market has remained weak with both spot months remaining at a discount. In raws the NV did momentarily improve to a small 3 point premium but soon fell back and, currently, trading at a 9 point discount. Some would argue this is because of the fund roll but it also suggests a more fundamental reason. In London the structure has taken a more pronounced drop with the QV now at nearly $8 discount. This suggests ample physical supplies until the end of the season. The White Premium has also fallen away over the past couple of sessions to levels that are probably below most refiner’s costs. Physical demand did pick up a few weeks back but that more a consequence of a drop in prices than any surge in overall demand. While traders have been concentrating on the situation in Brazil it would seem that consumption is still being curbed by the pandemic in many areas of the world.

Fundamental news has been relatively sparse with attention, understandably, focused on Brazil’s CS. The dry weather seen between November and May has been broken to some extent since the beginning of the month with variable amounts of rainfall across the region. It is too early to see what impact this rain will have on the cane crop. Some argue ‘too little too late’ while other are taking a more pragmatic view that any rain is good for the cane. Yesterday Unica released their harvest data for the second half of May which showed the crush and sugar production running around 11 % down on last season’s record crop. It is worth noting that the 2.623 million tonnes of sugar produced is a record for the second half of May. In same period 2019 the cumulative cane crush was within a million tonnes of this season but sugar production was a third lower due to a much higher use of cane for ethanol production. Currently, the data continues to suggest that total sugar production for the season will reach around 35 million tonnes – some 3.2 million tonnes less than last season. However, there is another six to seven month before the harvest finishes and much can change. Agricultural yields are running around 9% lower than last season and demand for ethanol is growing. However, the mills are particularly well priced for the current season and at much lower levels so it is unlikely they will buy back unless prices drop to below 15 cents.

India’s harvest has finished with total production just below 31 million tonnes. They have now probably fulfilled their, subsidised, 6 million tonne export target with some additional sales without subsidy. Until the next subsidy policy is announced for next season by the Government (or not) exporters will have to compete in the market without the luxury of any government help. It is thought that at 18 cents and above India raws become viable and probably explains the lack of desire to push prices up to this level. The Government recently announced they were bringing their ethanol policy to add 20% to gasoline by another 2 years from 2025 to 2023. This should mean their excessive sugar stocks will eventually be whittled away assuming farmers do not continue to increase their cane planted area. However, it is unlikely to have a huge impact next year as implimenting the policy will be much harder than announcing it. Therefore, export subsidies are likely to be needed again next season. How generous the government will be remains to be seen but it is likely to be lower than even the recently announced level. Less money is available as the country continues to be savaged by Covid and it likely supply/demand maybe tight enough next season for Indian exports will be needed to plug supply gaps as seen during the current season. This year’s monsoon has started hitting the southwest coast last week. Current forecast see total monsoon rains 106% of long-term average which bodes well for next season’s cane crop and the following.

Elsewhere there is not too much to report. The EU beet crop seems to have recovered from the late frosts that hit French and, to a lesser extent, German farms. The French Food agency announced earlier this week that their total beet planted area is estimated at 397k hectares  only marginally lower than their first estimate before the frosts of 400k hectares. The weather across the major beet regions of the EU has been beneficial to the developing crop.

While the sugar market has been caught within a range recently the movement within the range has been, largely, influenced by the macro. The USD has been relative volatile as the market digests Fed policy statements and inflation increases. Data released yesterday showed that US consumer prices increased by the most in nearly 13 years in May, year-on-year. Rising demand, supply chain bottlenecks and economic recovery from lockdown. Core inflation also surged hitting 3.8% for the first time since 1992. However, traders and analysts are confident that the inflation surge will be temporary. Nevertheless, the spectrum of global inflation getting out of hand still is likely to remain a possibility and this will remain supportive to raw commodities. Price direction for sugar in the short term is difficult to gauge. The market looks well supported at 17 cents but with selling at 18 cents so perhaps the market remains range bound. End users are still under-priced and will look to take advantage of any weakness while possible Indian selling is expected at 18 cents and above. So, as usual, the funds will probably determine which end of the range prices might break out. Last COT showed they were around 186k lots net long. It would seem unlikely the long-term large funds will liquidate their positions with prices remaining firm across the agricultural commodity spectrum. Whether they have the appetite to increase their longs remains to be seen but with the spot month at a discount they maybe reluctant.