Weekly Sugar Wrap for 23 July

Over the past two week sugar has dipped nearly 100 points before improving again with prices virtually back at the same level a fortnight ago. The trading volume has remained underwhelming to say the least as traders remain nervous about the fundamental picture with concerns growing over the state of the Brazilian CS cane crop with over a third of the harvest completed. However, physical demand remains poor with the spot month in both markets remaining at sizable discounts. The August white sugar expiry emphasised the situation with a minimal 75k tonnes of sugar delivered all from India with the QV spread at a $19.50 discount at expiry. The flat price in New York dropped on fund liquidation to near Brazilian ethanol parity the previous week as the macro turned bearish with inflation haunting the markets again. OPEC, after much dithering, agreed to increase crude production which saw crude prices drop back below $70. The USD improved to its highest level since early April which also weighted on all commodity prices. Sugar prices have slowly improved over the past few sessions but, essentially, prices remain within the range seen since late April.

Sugar fundamentals continue to be dominated by Brazil and their CS sugar production. The last Unica harvest data for the second half of June was rather higher than expectation with the crush over 4% higher than the same period last season and sugar production neatly 6% higher. However, concerns remain over the state of the cane which has now been hit by cold weather and frost damage has occurred although it is still difficult to assess the full extent. Analysts are beginning to lower their final expectations for the season with estimates now below 34 million tonnes and could slip towards Wilmar’s early season total of just 31 million tonnes. There is also a growing view that cane may not fully recover fully for next season. The weather will be crucial. Long term weather forecasting models are, currently, suggesting rainfall will return to normal from September but with the possibility of a mild La Nina developing nothing is certain. Prolonged and heavy rains though the Brazilian summer are needed to help the soil moisture levels recover. Nevertheless, given the right weather conditions cane has a remarkable ability to recover.

Apart from Brazil there is little other fundamental news. Most other major producers seem to be having little weather issues with good monsoon rains across India which has recovered after they faltered for a while after the excellent start. Across Europe the weather has been good for beet. Russia beet shows an average root weight of 171 grams compared with 165 grams last year. Thai sugar production is being lowered due to competition from Cassava. Czarnikow report they see sugar production still reaching 10.3 million tonnes which would be over 2.5 million tonnes more than last season which was particularly poor. The Indian Sugar Mills Association reported that India’s sugar stocks could start the 2021/22 season at the beginning of October at their lowest level for four years after mills exported a record amount of sugar over this season. ISMA maintain next season’s sugar production will be similar to this season at 31 million tonnes. However, they did concede the planted area for cane has risen by around 3% to 5.46 million hectares and the weather had been beneficial so, assuming the weather remains good production maybe over 31 million tonnes despite more being diverted to ethanol production. This would mean the country will continue to have the ability to export similar quantities next season. The debate over what export subsidies the Indian government may agree will start soon. However, it could be argued that with prices just shy of 18 cents there may be no need for any subsidies. This time last year prices were languishing at below 13 cents well below Indian exporters break-even. The five cent improvement over the past 12 months is much closer to their selling level without subsidy.

The fundamental have swiftly come back into focus after the macro dominated for several weeks. Coffee prices have soared higher over the past 3 sessions as frost visits the main Brazilian coffee regions for the first time in two decades. It would appear that sugar could move back towards the highs seen at the end of June although the sharp backwardation of both market’s spot months remains bearish and may deter the funds from coming back on the buy side in the short term. The weakness of the spot month is because of a lack of any near-by physical demand. Much is because freight rates have increased so much that it has seen end-users holding off replenishing stocks. Nevertheless, consumption does seem sluggish with the world still very much struggling to contain Covid especially as the new Delta variant spreads rapidly.

Early this year most analysts were pencilling in a small global surplus for 2021/22. It is likely this surplus has probably disappeared due to the lowering of Brazilian CS output. At the moment it is probably wise to assume it is, currently, a balanced picture but could quick fall to a deficit. However, unless CS production slumps dramatically and issues elsewhere develop it is unlikely the deficit will grow to a level which Indian exports cannot plug. Therefore, currently, the market looks well supported with more potential on the up-side especially if the funds turn more friendly to the market.