Over the past two week the sugar markets have remained volatile with prices rallying to their highest level since late February after a cold front crossed the South of Brazil causing serious damage to coffee trees and frost damage to cane regions especially in Sao Paulo. Prices remained firm as another front was predicted to cause further damage. In the event temperatures did not fall to dangerous levels and this prompted a huge selloff in coffee and a rather more measured drop in sugar prices. After a period of consolidation when prices built support at below 17.80 yesterday saw the market rallied nearly 70 points as analysts start to cut their expectations for the total CS sugar production which has brought buying to market. Unica released their harvest data for the first half of July that was probably slightly better than expectations. However, while the headline data meant that the crush and sugar production is around 7% down on the same time last year the underlying yields of the cane are suggesting things may soon start to impact on total production. The second half of July data, which should be released early next week, will be eagerly awaited.
The dry weather that has been prevalent across the main cane regions of Brazil for over a year now and the recent cold weather has had analysts reaching for their production spreadsheets to mark down Brazilian expectations. Over the past week Wilmar lowered their expectations for the total crush to between 490 and 500 million tonnes over 100 million tonnes less than last season. They see total sugar production at 28 million tonnes. Wilmar have been very pessimistic about production right from the start of the current harvest initially predicting production at 31 million tonnes which was dismissed as overly gloomy. Other analysts are taking a more measured attitude with most now putting their estimates between 33-34 million tonnes but with the proviso that they may well lower their figures before long. The dry weather has long been an issue but the damage from frost has been difficult to assess. Some have points to the fact that much of the area impacted had already cut the cane but, undoubtably, other areas will have seen damage to the standing cane. The other issue is the impact the weather is having on next season’s prospects. Some are already predicting lower output because of the cumulative impact of the long term drought and frosts. Much will depend on the weather during the important inter-season lull in crushing. If ideal weather with excellent rains is received across the CS then the cane could quickly recover. Cane is very resilient and can miraculously recover is given the right conditions.
Elsewhere there is little fresh fundamental news. The India monsoon is remaining good after a bit of a wobble in June. Indian state weather forecasters see average rains in August and September before the end of the monsoon. Currently, most analysts continue to see total production at around 31 million tonnes – some 5-6 million tonnes more than domestic consumption. Having sold all their subsidised sugar India exporters have been able to conclude non-subsidised sales recently when H-22 pushed above 19 cents on shipments for late this year/first quarter 2022. Undoubtably, they will be looking to sell more if prices rally further. Currently, it would seem unlikely the Indian government will need to subsidies exports next season which will be a relief to their treasury and other exporting countries. Beet development across the EU is, as usual, mixed but, overall, looking better than this time last year when very hot dry weather was having an impact.
The other side of the equation – demand is much more opaque. Currently, the spot months in both markets are at a heavy discount to the rest of the board which has, undoubtably, impacted on the market’s ability to push to new highs. Most see the lack of demand as a consequence of the very high freight rates at the moment with end-users falling back on stocks in the hope that rates will drop back later this year or first quarter next year. This is, obviously, a dangerous game and could mean they have to buy sugar at higher levels and still have to swallow high freight costs. How actual consumption is fairing is very difficult to quantify. Many see global consumption improving after the actual fall last year but will struggle to get back to pre-pandemic levels. One also has to remember consumption was under pressure well before Covid appeared as a multitude of Governments introduced measures to cut sugar consumption as they look in ways to combat increasing obesity levels.
Currently, the markets are holding the gains of yesterday and look likely to push higher. There is limited resting selling above the market so the highs of last week (18.81) are well within range with 19 cents the next target. However, the trading volumes remain disappointingly thin and as traders know, no move is likely to be substantiated without volume. So the market could become volatile on bouts of long liquidation. As mentioned current levels will be of interest to Indian exporters although they may see the possibility of higher levels and be more circumspect. With the likelihood that Brazilian production will be lowered as the current harvest reaches its halfway mark support should remain in place at below 17.80. The macro will continue to be an important influence on the markets. Recently it has been hit by concerns over the rising cases of the Delta variant across the world especially across Asia and, in particular, in China. A serious collapse in the macro picture may well impact on sugar prices regardless of Brazil – otherwise it would seem the sugar market will remain bullish.
Contact the ADMISI Sugar Desk team:
Howard Jenkins, Kevin Watkins, and Steven Trigg
Phone: +44(0) 20 7716 8598
Email: admisi.sugar@admisi.com
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Risk Warning: Investments in Equities, Contracts for Difference (CFDs) in any instrument, Futures, Options, Derivatives and Foreign Exchange can fluctuate in value. Investors should therefore be aware that they may not realise the initial amount invested and may incur additional liabilities. These investments may be subject to above average financial risk of loss. Investors should consider their financial circumstances, investment experience and if it is appropriate to invest. If necessary, seek independent financial advice.
ADM Investor Services International Limited, registered in England No. 2547805, is authorised and regulated by the Financial Conduct Authority [FRN 148474] and is a member of the London Stock Exchange. Registered office: 3rd Floor, The Minster Building, 21 Mincing Lane, London EC3R 7AG.
A subsidiary of Archer Daniels Midland Company.
© 2024 ADM Investor Services International Limited.
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