Weekly Sugar Wrap for 2 September 2022

Over the past month the sugar market has maintained reasonable volatility although rather less than the large daily moves seen in July. As usual it has been the activity of the funds which has dictated direction with the macro adding to the mix while there has been no huge change in the fundamental picture. By early August the funds had amassed a 70k lots net short position, their largest since early 2020, which saw prices drop to their lowest level in two years. Somewhat inevitably, they soon start to cover once some support appeared with prices rallying 150 points during the first half of the month with limited scale up selling found until 18.50 was breached where producer selling was waiting. This initiated a more trade inspired sell-off which saw prices drop back to the end-user pricing found below 18 cents. Over the past couple of weeks prices have remained range-bound albeit in a 90 point range with prices currently in the middle of this range. The funds have bought back but probably still remain around 20k lots net short and have been relatively inactive recently. As mentioned the macro continues to dictate daily direction. The gloomy global economic outlook continues to weight on commodity prices as the USD surges and demand is expected to be hit as major economies slow.

On the fundamental side it is a case of conjecture more than actual facts. Brazil is a case in point. The last Unica report for the first half of August was disappointing with the crush, production and split below expectations. Currently, cumulative totals are still lagging behind last season with the crush 8% down and sugar production nearly 13% lower year on year. However, it was this stage last season that things began to deteriorate due to the drought and frosts that the cane had endured. Currently, analysts are of the opinion that things will improve for the current harvest with more cane and higher yields plus a further shift to sugar production over ethanol which has become the poor cousin recently as Petrobras continue to lower fuel prices and ethanol demand remains sluggish. The majority of analysts now believe total CS production will break 33 million tonnes which will need mills to continue crushing well into December. The weather has been good with rain periods between the usual dry weather. The ten day forecast sees more rain episodes across the CS. This also bodes well for the prospects for next season although this will be more dependant on the rainfall during the summer.

In India the monsoon continues to progress satisfactorily with August seeing 3.4% more rainfall than average. This means that total rainfall is running about 6% higher than average after good rains in July made up for the stuttering start in June. All this augurs well for the next cane harvest after India produced a record breaking 36 million tonnes in 2021/22. It would seem that another 36 million tonnes is entirely possible even with more cane being diverted to ethanol production. Therefore, exports will be inevitable again after the 11.2 million tonnes of exports this season. Currently, no more exports for the season are allowed but it has recently been reported the Government will soon announce their export policy for next season which starts in less than a month. It is expected that a total of around 7-8 million tonnes will be allowed with a first tranche of 4-5 million tonnes from the beginning of the season and another tranche later in the season once the harvest and domestic prices have been assessed. It has been reported that some 300k tonnes of raw sales for 4^th quarter shipment have already been made in anticipation of exports starting again. The Government has a delicate balancing act to perform making sure domestic prices do not fall to a level that the mills cannot afford to pay the farmers but also do not rise to a level that makes sugar too expensive and fuels inflation. Assuming production is around 36 million tonnes then exports of around 8 million tonnes should not have any marked impact on prices.

The EU’s beet crop has had a difficult summer with dry and exceptionally hot conditions across several of the larger producers. An additional issue is the rise in processing costs which will hit factories as energy prices spiral higher especially for gas which many use as the primary energy source. France’s Tereos and Cristal Union have already announced they will start operations early so as to avoid possible energy restrictions during the winter happy to sacrifice some yields as opposed to leaving beet to rot in the fields.

While raw prices have remained well below levels seen earlier in the year the London market has remained very strong with the spot October contract hitting a contract high this morning. There appears to be several reasons for the strength of white sugar compared to raw which has seen the White Premium blow out to over 170.00 today. During the pandemic many end-users de-stocked sugar because of lock-downs restrictions and rocketing freight rates. This has now led to the need to re-stock as demand has improved. Restrictions on Indian white sugar exports, export bans elsewhere and other local issues has meant a severe tightness in the physical market. Additionally, the cost of refining sugar has surged higher on burgeoning energy prices and general inflation. The London contract being break-bulk has also played a part in London’s strength. Given the structure of the market it does not look as if the trade see any elevation of the tightness until the second half of next year but the expected global recession may impact before then.

2021/22 has been a volatile season with prices hitting 20.69 back in November before crashing back to 17.60 by January only to surge to 20.50 in April before a more emphatic slide in prices which sees them holding around 18 cents. Currently, 2022/23 would seem likely to be less volatile as we enter a probably surplus season. The ISO reported earlier in the week they see a global surplus of around 5.5 million tonnes. This is assuming Brazilian, Indian and Thai production is not hit by any significant weather issues and global consumption remains subdued. Undoubtably, there will be surprises whether directly related to sugar or the general global outlook. The Russian/Ukraine war continues to have huge consequences across the globe and looks set to continue to dominate the news for the foreseeable future. The up-coming Northern hemisphere winter could be very challenging for many with the possibilities of energy restrictions across Europe. Sugar sees the October contract expiries in both London and New York. Both spot months are at a premium. While London is understandable it remains to be seen whether NY’s premium will be maintained. Traders seem content for the flat price to remain around 18.00 cents but down-side pressure may build if Brazil’s output starts to accelerate and India defines their export policy.