Weekly Sugar Wrap for 4 August 2022

Over the past month the sugar market has remained as volatile as for the previous four months. At the beginning of July prices dropped to a four month low of 17.71 before jumping 135 points in just three sessions leaving a technical double bottom on the chart. Prices eventually topped out at just shy of 19.60 before crashing over 200 points in just six sessions. The market took a breather before dropping again to hit one year lows. Since then market has been in consolidation mode but the jury is still out as to whether 17.20 cents will prove to be the short term low. As is often the case the recent recovery and collapse has been purely orchestrated by the funds. At the beginning of July they were essentially flat before going short some 40k lots. Their rapid covering of this position saw prices jump as they eventually went long again albeit a minimal 25k lots. Spooked by a deteriorating macro picture they liquidated longs and built a sizable short position, their biggest since March 2020, which saw prices collapse to their lowest level since 20^th July 2021. Currently, they are probably around 65k lots net short. This see-sawing by the funds has allowed producers to prices and, more significantly, allowed good pricing by end-users. Over the past month the commercials’ net short position has dropped by over 90k lots. Interestingly, during this time the structure have remained unchanged despite the flat price weakness. The VH settled at -12 last night the same level when the flat price was 190 points higher in the middle of July. In London the flat prices has declined in line with NY but the structure has remained at a very strong premium which has also kept the White Premium at levels where, virtually, every refinery can make money. The London August contract expired with a relatively small delivery of 226,400 tonnes mainly from India and Thailand with a small parcel from Dubai. The spot month expired at a large $39 premium which coupled with the small delivery was seen as bullish. Therefore, the VZ spread ballooned out to a $33 premium although has fallen slightly since.

All eyes remain on Brazil’s CS. The harvest is now nearing half way. After a slow start it is now in top gear. The last Unica report for the 1^st half of July was above expectations. The ATR and sugar/ethanol split continues to improve with the latter now above 47/53. However, cumulative cane crush is 9.5% lower year on year with sugar production some 2.66 million tonnes lower compared with the middle of July 2021. Fuel price cuts by Brazil’s Petrobras coupled with tax cuts has seen ethanol parity drop to below sugar prices so it would seem unlikely the split will deteriorate significantly for the rest of the harvest. Assuming the ATR remains reasonable then total sugar production will depend on amount of cane available and how long the crush continues. Most analysts are putting total production at around unchanged from last season at 32 million tonnes. For this to be achieved the harvest tail will need to be longer than last season. There has also been some chatter about dry weather. Without stating the obvious, it is always dry at this time of year across the main cane regions. However, the 10 day weather forecast does see rain which will be patchy but will help keep soil moisture at average levels for August.

The India monsoon has been good over the past couple of months after a rather stuttering start. June saw rainfall around 8% lower than the long-term average while July was 17% higher and the wettest since 2005 with over 300mm of rain. The forecast for August and September suggests average rainfall which should mean total rainfall for the monsoon will be adequate. The planted area looks likely to increase marginally so another bumper harvest is expected. ISMA have already predicted 35.5 million tonnes. Given their early estimate last season was 15% below actual it might be argued another record production could be seen. Export caps are now occupying analysts minds. Somewhat unexpectedly the Indian government decided to impose a 10 million tonne export cap for the current season a couple of months ago. Since then they have allowed another 1 million tonnes to be added after shippers were in danger of defaulting on sales concluded before the cap. It is thought that the Indian government will impose an export cap for 2022/23. Current thinking it will be around 6-7 million tonnes initially with it increasing as the season progresses. Exporters want to have confirmation so as to be able to take advantage of any tightness as the Brazilian harvest comes to an end. Currently, prices are too low and there is precious little chance of any Government export subsidies. With this in mind prices may have to rise to find Indian sugar because while a global surplus is expected for next season Indian exports will be needed.

There has been some chatter about hot and dry weather hitting EU beet production. However, it would seem these concerns may have been premature. The beet was planted in good conditions and there was no late frosts this year as seen across France in 2021. Beet develops a large tap root which can seek out moisture much better than grain plants. Additionally, recent rains have helped alleviate the parched soils in Northern Europe. Earlier today Tereos reported that they see French beet yields better than the five-year average despite lack of rain although much will depend on the weather through to harvest.

The wider global macro picture has continued to influence commodity prices and sugar has been no exception. The huge price jumps in crude and grains caused by the Russian invasion of Ukraine are a distant memory as fears of a global recession and raging inflation have taken prices down with a distinct risk-off attitude seeing funds reduce their record long positions across the commodity spectrum. The surging USD has also added to the bearish sentiment. Looking specifically at sugar, prices have dropped some 15% since the highs of April. Some might argue that this is justified with a global surplus looming for next season. Other argue that nothing is certain as yet and prices will have to improve to find sugar. A recent Reuter’s poll suggested prices would end the year around 18.50 which, given what we know, might not be a bad shout.