Weekly Sugar Wrap for 16 January

Over the past 10 weeks, the world has seen the continuation of the Russian/Ukraine war with little respite and is now at a standstill at ground level as winter bites. Despite this, crude prices have fallen back to nearly $70 per barrel (WTI) in December and now find resistance at $80.00. European gas prices are also below pre-war levels thanks, mainly, to a relatively mild winter so far across Northern Europe. In Brazil, Bolsonaro was replaced by Lula. Back at the end of October the raw sugar market was languishing near the lows seen over the past three months at just above 17.50 cents with the funds holding a minimal 28k lot net long position. The expected London sugar dinner rally had petered out before it had really started and many traders were of the view that little would happen through to the end of the year. The old traders’ adage ‘expect the unexpected’ suddenly became relevant as prices rocketed higher. Barely three weeks later the market was topping out at nearly 20.50 cents with gains practically every session. The funds awoke to buy afresh with the trade somewhat taken by surprise. There was a period of profit taking and consolidation before another wave of fund buying took their net longs to over 174k lots and saw prices breach 21 cents and hit their highest level since the 7th February 2017. Since then prices have, somewhat inevitably, dropped back on profit taking starting in between Christmas and New Year culminating with two month lows being reached a week later. Since then prices have improved and are staging some consolidation before the next move. The one thing that has been consistent during the flat price rally and volatility has been the continuing strength of the structure. The HK was over 100 point premium at the end of October and has improved to an unprecedented 154 point premium as flat price sailed over 21 cents. So while the flat price has been propelled higher by the funds the whole move has been supported by the view that physical raw sugar is in tight supply coupled with the fact that little producer selling was to be found in the spot month having been fixed many months ago. Yet, the very steep backwardation seen at the moment continues to emphasise that physical supply will improve over the coming months. When H-23 was above 21 cents the N-23 was over 260 points lower.

This increasing production is coming from the usual origins: Brazil, India and Thailand. The 2022/23 season has, essentially, finished with total CS production likely to be a tad over 33.5 million tonnes up 1.5 million tonnes from the previous season’s poor harvest when drought and frost hit the cane hard. As is often the case nature frequently irons out abnormalities. Consequently, it has been raining across the main cane regions of Brazil for several months which has hampered field operations and has, ultimately, drawn the harvest to an early close despite millions of tonnes of cane still standing. While frustrating for mills when prices are at such an appetising level it does bode well for the 2023/24 crop. The rain has, undoubtedly, erased the vast majority of the drought damage and could see total production bounce back to over 36 million tonnes. Additionally, weather permitting, the crush should also start early and before the beginning of April as mills cut the remaining standing cane left. However, much can happen over the coming months. The new Lula government looks likely to reverse some of Bolsonaro’s fuel tax cuts which will help improve ethanol parity as might the current strength of the BRL. Nevertheless, mills are very well priced for the up-coming season and will not be tempted to buy back unless the market collapses or the price of ethanol rockets neither of which look particularly likely.

India, the largest sugar producer for last season and probably this, is well into their harvest. The Government announced in early November that they would, initially, allow 6 million tonnes of exports with more approved once production and domestic demand were assessed. Early chatter that total production might drop 7% from the 36 million tonnes produced in 2021/22 due to uneven monsoon rains were, initially, pooh-poohed, especially as year-on-year production was increasing. However, some analysts do see a drop in Maharashtra which will become apparent over the coming weeks. Traders will be wary as increasing Indian production rarely reverses. Therefore, most are still working with 36 million tonnes, give or take a million either way and, at least, another 3 million tonnes of exports being allowed.

Thai production is also increasing. Very much like Brazil, the country saw a devastating drought which hit the 2020/21 cane hard and took another season to recover. The current 2022/23 harvest is now in top gear with all mills operating. As of last week, total sugar production had reached 2.68 million tonnes some 8 % higher year on year. With around 12-15 million tonnes more cane to crush this suggests total sugar production could reach 11.00 million tonnes.

Elsewhere there appear to be no huge areas of concern. It is far too early to make any predictions for the EU beet crop after it was hit hard by dry and hot conditions last year. The threat of substitute crops due to the problems in Ukrainian production may be off-set by high white sugar prices.

Demand, as always, is so much harder to get a handle on and often retrospective. Nevertheless, most analysts are seeing decent growth in consumption and demand over the coming year. There is still a concern over the expected recession that might hit many economies during 2023 but, with China finally lifting Covid restrictions, the world is fully post-pandemic and should see, at least, a population growth increase in consumption. Nearby demand remains decent as end-users restock with Indian exports not having the impact some had expected especially in raws as the mills concentrate on white sugar production. Some buyers will try to defer buying and will remain very much hand-to-mouth hoping to take advantage of the lower prices seen later this year.

The macro picture continues to be very uncertain over the coming months. Only a change at the Kremlin seems likely to have any marked impact on the war which will reach a full year at the end of February. The raging inflation that has hit so hard during 2022 may ease slightly with interest rates topping out in the US but a reduction would seem improbable. The USD has weakened decisively since September and could decline further. Several investment banks are seeing crude jump to around $110 per barrel during 2023 but, based on their previous predictions, said only to encourage their investment clients. Sugar will remain within the macro caldron but, ultimately, supply and demand will dictate prices. Experience suggests there are still some games to be seen before the H-23 expiry. After that traders will turn to the prospects for the Brazilian harvest and all the accompanying intrigue. Weather issues will rear their heads either to quickly dissipate or grow. Global geo-political tensions will also ebb and flow. The sugar market is likely to, therefore, remain volatile keeping traders and brokers on their toes.