Weekly Sugar Wrap for 3 September

Holidays and a positive Covid test meant it has been three week since the last ‘sugar wrap’. However, it has not been particularly exciting with prices remaining within a one cent range. Nevertheless, in the middle of August prices did hit their highest level for 4 ½ years as concerns over the state of the Brazilian CS cane crop started to impact on Unica data. Since hitting the highs prices swiftly slumped back below 19.50 on profit taking and a deteriorating macro picture as markets got another case of the jitters regarding the continuing pandemic. Another attempt to push higher petered out just short of the previous highs as a double top was put in place. Currently prices are holding within a narrow range with a double bottom at 19.61/62. Against the bullish backdrop of Brazil is the structure weakness with spot months in both market remaining at a large discount to the rest of the board suggesting a lack of physical demand. The White Premium also remains weak and below refiner’s costs.

There has been no further cold weather across Brazil’s CS region since the unprecedented frosts that hit in late July. Equally, there has not been any significant rainfall either. The last Unica report for the first half of August saw sugar production drop 7.5% compared with the same period last season. It was in line with expectations with the market ending unchanged on the day of release. However, agricultural yields continue to drop and many believe there will be a short tail to the harvest end this year. Up until the 16^th August cumulative totals for the season see the total crush down 6.7% at 349.5 million tonnes and sugar production down 7.5% at 21.32 million tonnes. Analysts have been slowly lowering their expectations since late June with most now seeing a total cane crush of no more than 560 million tonnes and sugar production below 33 million tonnes. However, there is a general air of concern that things could worsen further and that Wilmar’s early season estimate of just 31 million tonnes could be a struggle to reach. It is now a virtual foregone conclusion that the global deficit will be seen in 2021/22 when a small surplus of 1-2 million tonnes was the expectation back in April/May. As to how large the deficit could become will be determined by Brazil’s output over the coming months.

All eyes remain on Brazil while it is in between harvests for most other major producers. Currently, there appears to be little concerns on the developing cane and beet crops with a few regional exceptions. India’s monsoon has been mixed this year with an excellent start before a more patchy performance during July and August. Currently, local forecasters are expecting the rains to pick up again during September which should bring the total back within the long term average.

The flipside to the Brazil’s bullish picture is the lack of physical demand which has seen the spot months in both markets remain at heavy discounts. Currently, the VH remains around -70 while the VZ in London remains at more than $20 discount. The lack of demand, especially in white sugar, has been noted for some time and has seen the white premium fall to a very low level. While it has recovered from the lows seen at the end of July they are hardly at levels which will encourage refiners to buy raws. The big question is whether the weak demand is due to pandemic induced drop in consumption or very high freight rates seeing end-users using existing stocks in preference to incurring the freight costs with the lack of containers exacerbated the situation further for white sugar. It would seem it is mainly the latter with end-users happy to use destination stocks hoping freight rates will drop back. This, of course, is a risky decision. Freight rates are not expected to fall back anytime soon with some seeing no significant decline until 2023. This suggests that demand will eventually increase and could be more concentrated in certain time periods compared with normal. This could see prices spike and structure tighten significantly. As usual timing is uncertain and difficult to predict.

The market is lower today but within the range of the past two sessions as prices continues to consolidate at their highest level since February 2017. It would seem very unlikely prices will collapse from current levels with so much uncertainty over the final Brazilian figures although it is possible a plunge in the macro could cause the funds to liquidate.  There is, undoubtably, more scope on the up-side although whether it could be enough to encourage the funds to increase their longs remains to be seen. India has taken advantage of the higher prices and sold forward up to 750k tonnes according to analysts. As during the current season their exports plugged supply gaps and look likely to do so for early next year before the next Brazilian crop become available. However, they will struggle to continue to fill gaps if Brazil has another poor cane crop next season. The weather will be crucial over the coming six months and will have to be ideal for the cane to recover sufficiently. With La Nina lurking and more extreme forecasters talking possible more cold weather for next year traders will not relax their weather watch for the foreseeable future.