Weekly Sugar Wrap for 28 October

Since our last missive, the market is currently around unchanged although there has been the odd macro inspired slump and a push up towards 19 cents stirred by weather concerns in Brazil, and perhaps fuelled by the gathering of the good and great of the sugar world for the biennial London Dinner. Both markets have seen the expiry of their October contract at a healthy premium. The strengthening of the structure was probably been the main driver for the higher flat price. However, over the past fortnight prices have slumped back to their August/September range as the funds have liquidated longs built up earlier in the month but, tellingly, the structure has not weakened. The structure probably neatly sums up the state of the sugar market at the moment. The spot month is at a large 95 point premium to May 23 and over 120 point compared with March 24 suggesting tight physical supply through to first quarter next year when ample physical supplies are likely to prevail.

As usual, Brazil is instrumental in the market’s pricing. Their current 2022/23 harvest has been a roller-coaster in anticipation and expectations. As one will remember the previous season a once in a lifetime (hopefully) drought hit the CS region. The cane shrivelled, burnt and then froze resulting in the lowest sugar production since 2012. The weather did improve during the off-season but many feared the cane was far from recovered and production would struggle to better 2021/22’s 32 million tonnes. Louis Dreyfus were even more pessimistic stating that 29 million tonnes was more of a realistic target. The season got off to a slow start as mills gave the cane a chance to recover. The other issue was that crude prices had exploded higher when Russia invaded Ukraine and this was expected to lead to surging ethanol demand and mills switching heavily to its production. Again, many of the soothsayers were proved wrong when crude prices dropped and President Bolsonaro, mindful of the upcoming Presidential election, cut fuel taxes resulting in Brazilian ethanol parity dropping well below sugar prices. Soon analysts were upping their estimate which turned prices lower. Ironically, rain was the next concern. Unseasonal rains began to hamper field operations resulting in very poor crush and production during the second half of September with prices rallying. Things improved during early October and, subsequently, prices have fallen. Currently, analysts see total CS production at around 33 million tonnes but much will depend on the weather over the coming weeks. It is estimated that between 20 – 25% of the cane still remains to be crushed and the season will have to extend well into December. Needless to say, the rains bode well for the next cane crop which is only five months away. Already analysts are pencilling in 36 million tonnes of sugar with one suggesting that there is a possibility that production could reach 38.5 million tonnes which would be close to the record production in 2020/21. This scenario is one reason for the sliding prices in the back months. Needless to say, much can change not least the wider global picture so it will be many months before we will know if the predictions will be accurate.

The other producer who can influence world prices is India. The 2022/23 season is just starting. Many believe total production will be similar to the 36 million tonnes of last season after an unprecedented fourth consecutive good monsoon. So a sizable surplus over domestic consumption allowing large amount of exports. Agreed by all including the Government. However, the Government has failed, so far, to say how much they agree and announce their export policy for this season having capped last season’s exports at 11 million tonnes. The general view is that they will allow up to around 9 million tonnes but in two tranches. The first is to be 5-6 million tonnes then more after assessing local prices and harvest potential. With shades of three years ago when the market waited weeks for their export subsidy programme we still await their proclamation despite being told in September the decision was imminent. Being eminently cheaper and easier to control than subsidies it is difficult to know why the delay. Again the prospect of a possibly 37 million tonne production is weighing on prices even without a policy.

The EU is the one main producer where the weather has not been kind. Everything was looking great at the beginning of the season. The seed went in without delay. However, very dry and hot weather soon started to hit soil moisture levels and even the long taprooted beet struggled. Additionally, the total planted area dropped as more profitable crops were substituted which in hindsight may have been a mistake as spring sown grain crops suffered even more in the drought. The combination of both meant production is likely to drop by 8% to 15.5 million tonnes against a slight rise in consumption to 16.8 million tonnes.

Currently, there appear no huge issues elsewhere. Somewhat surprisingly, too much rain is the biggest current issue across several producers including Australia and Pakistan. Elsewhere, production is similar to last season in medium to minor producers. All this means that a global surplus in production is almost a certainty this season. Estimates as to how large vary from around 1.5 million tonnes to 4.5 million tonnes. Given the possibility of a bumper cane crop in Brazil for 2023/24 and a good monsoon this year in India very early indications are that another surplus could be seen in 2023/24.

Demand is always harder to determine. Most see consumption improving but not at the rate seen before the pandemic. There are still pockets of concern. China still adheres to a fairly draconian Covid policy which could dent their need for imports although recent buying was cited as a reason for the jump in prices earlier this month. Another slightly forgotten aspect of consumption is the lowering of sugar content in many processed products due to health concerns. Once a topic for serious debate it was washed away by the pandemic but still might have an impact especially if demand is hit in areas where sugar and health are not so closely linked.

The current strong inverse markets suggest nearby tightness. White sugar has been in contango for several months and the spot month still remains at a healthy premium. There are several reasons cited. During the pandemic when transport was slow, difficult and expensive many end-users destocked. This was, predominately, refined sugar. As the pandemic waned there was a need to restock but the availability was tight. Timing, political and other local issues plus rocketing refining costs meant refiners struggled to meet demand. It was only after the White Premium climbed to unprecedented levels that refiners cranked up production. Recently, the structure has weakened especially further down the board. The raw sugar spot month also remains strong but that may be more in anticipation with another four months until expiry. Concerns over the final CS production and the Indian export policy play a part as does the strength in whites.

The wider macro picture also continues to influence market prices albeit more short term. The Russia/Ukraine war continues but the world is adapting. Crude and gas prices have both dropped back to pre-war levels. World food prices are, also, dropping albeit at a disappointing rate. Therefore, the world still looks gloomy but, perhaps, not as grim as back in the Spring.