Weekly Sugar Wrap for 16 April

We predicted that the bottom of the market may have been put in place at the beginning of April but was not expecting prices to rally 90 points over the past week. The macro has been the markets friend this week with a very positive picture due to slightly lower than expected inflation in the US so far as they come out of lock-down and the economy starts to fire-up. Continuing good demand for commodities for China has also added to the mix although this appears not to have been the case for sugar. From a fundamental basis here is little firm changes to have sparked the rally but more a perception that Brazilian sugar production will be lower than 36 million tonnes the general expectation a couple of months ago. However, it is very early days in the current CS harvest. The second half of March sugar production was, indeed, down some 23% from the same period last year but with just under 5 million tonnes of cane crushed it is hardly compelling evidence of a sharp decline. The harvest is off to a slow start so it is unlikely any meaningful data will be seen until early May. However, this has not stop analysts and traders taking a view. The May expiry in London was quiet with early figures suggesting a delivery of around 132k tonnes with the usual cohort of trade houses involved either side. The delivery is around the average tonnage for the past seven years so there is little chatter of whether it is bullish or bearish. All eyes now focusing on the May raws expiry. The May is, currently, trading at a small premium and may improve further. However, the huge 140 premium the March reached before expiry is very unlikely to be repeated especially as end-users took the opportunity to price when prices fell in March.

We have discussed the Brazilian CS enough over the past few weeks and little has changed apart from sentiment becoming more bullish over the total production. Ethanol prices remain weak as Brazil continues to battle against the Coronavirus with, it has to be said, limited success so with as much cane going to sugar production it will a question of how much cane is available to crush and the yield that is produced. French farmers are continuing to reel from the unseasonal frosts that have hit many of their crops including sugar beet. It is now estimated that up to 50k hectares of beet could have been severely impacted by frosts recently. This represents over 12% of the already reduced planted area of 400k hectares. The government has promised financial aid the farmers who, historical, have a powerful influent on the French government. However, whether the farmers have the ability or inclination to replant their beet remains to be seen.

On the positive side the Indian state weather forecaster, IMD, released their early prediction for this year’s monsoon today. Currently, they see it as an average monsoon of around 98% of the 50 year average. Needless to say things can change by June when the monsoon will start. Last year saw well above average rain fall which was similar to the previous monsoon although that one actually caused damage after late flooding hit the cane fields. However, if the predictions are correct and the rainfall is evenly dispersed, which is not always the case, then another bumper cane crop will be seen next season and will also provide adequate moisture for the 2022/23 season. This begs the question on whether the Indian government will be continuing to handing out export subsidies. While the farming sector in India has a similar powerful hold on Government as the French the country continues to be hit hard by the pandemic and the economy is suffering as a result. Thai production for next season is also under scrutiny after its worst season for 13 years ended recently. The USDA yesterday said they see production bouncing back to 10.6 million tonnes a near 30% improvement. While most expect production to improve most analysts are pencilling slightly lower production. Much will depend on whether farmers plant more cane at the expense of other cash crops and, of course, the weather. Elsewhere, there appears to be no particular production problems and issues currently.

As mentioned above the macro continues to influence prices significantly. The USD index has dropped 2% from the highs seen at the end of March but concerns over inflation persist. Earlier this week the pace in US inflation it a 2 ½ year high as the economy starts to recover from the pandemic. However, the rise was lower than expectations and most analysts believe it will flatten out later in the year. Much of the increase was due to higher gasoline prices which, again, will probably not increase too much more. Crude prices, although improving, seem to be caught within a narrow $10 range with OPEC  policies supportive but shale-oil producers break even above $70 putting a cap on prices. Nevertheless, inflationary fears still persist and continue to be supportive to raw commodity prices for the time being. Most commodities have recovered from the general lows seen at the end of March when cases of the virus started to increase again across Europe and little change was seen in its control in Brazil and India. Sugar is caught up in the positive picture as being a prime raw commodity but the recent rally does seem to have been a little over-done. However, the funds have appeared on the buy side again and have ample ammunition to buy a lot more. Therefore, with the uncertainty over Brazil’s production it would seem the down-side is limited. India will continue to look to export. It is estimated they have exported around 3.4 million tonnes this season so have another 2.6 million tonnes to export with the export subsidy. Of course, if prices improve more then they will not need the subsidy to export and have ample stocks to do so.