Weekly Sugar Wrap for 1 July 2022

Over the past three weeks the markets have weakened with NY dropping just over 100 points and to its lowest level since the beginning of March. It has been a gradual but steady fall from over 20.20 cents reached on the 17^th May. There has been no one particular reason for the fall but a combination of weakening global economic news and a growing view that next season will see a global sugar production surplus that has weighed on the market. There has been a definite risk-off attitude taken by investors across all asset classes as raging inflation is seen plunging the world’s largest economies into recession. With the odd exception commodities have fallen across the board as the funds exit longs fearing a drop in demand for raw commodities. For agricultural commodities one can also add benign weather also impacting although this can change rapidly. The continuing Ukrainian war has been the catalyst to the downturn but many economists believe recession was probably inevitable as the world emerged unprepared from the pandemic lock-down.

The Brazilian CS harvest continues apace. After a slow start crushing is now at full throttle. There has been much debate on how much sugar will, eventually be produced. To be honest the picture is no more clear now than at the beginning of the crush. Most analysts are taking the view that production will be similar to last season at 32 million tonnes. The last Unica harvest data for first half of June saw the crush and production below expectations while the sugar/ethanol split was rather better. Currently, sugar production is lagging some 2.2 million tonnes behind last year. While the split is improving the ATR is lower so it is difficult to see the total exceeding last season. The amount of cane used for ethanol production will, undoubtably dictate the final total. The shenanigans between Brazilian President Bolsonaro and Petrobras have continued with another CEO being elected last week. According the Bolsonaro, Caio Paes de Andrade will bring a “new dynamic” to the company which roughly translated means Bolsonaro is likely to get his way on fuel policy. He has been helped by crude prices falling and the approval to cut the state ICMS tax cut which has seen gasoline and diesel prices fall at the pump. Currently, ethanol prices are falling with ample supply so it is likely the amount of cane diverted to sugar will increase although this may not impact immediately. The weather has been decent recently with rains helping the cane. More is needed although there is little in the 10 day forecast. With analysts reluctant to make any bold predictions for the current harvest it is not surprising even less is being said about the next harvest. So much can change but, assuming decent rainfall, one would assume the cane crop could reach 575 million tonnes. How much sugar is extracted from it is far harder to predict.

India has finished its 2021/22 harvest reaching 36 million tonnes of sugar – some 4 million tonnes more than the most optimistic estimates pre-harvest. Exports have been capped at 10 million tonnes for the season but are likely to creep higher. The monsoon has had a stuttering start but is expected to finish as average. This probably means another massive cane crop and similar sugar tonnage only tempered slightly by more ethanol production. Sugar cane remains the most lucrative of crops for Indian farmers. It is not a particularly work-intensive crop and the mills are even up to date with most of their payments to the farmers. The government has made no announcement on their export policy for next season but it is thought it will be for around 6-7 million tonnes. Mills are keen for the Government to publish their proposals so they can plan ahead and make sales during the Brazilian inter-season.

Elsewhere there appears to be no particular concerns. The 2022/23 Thai harvest looks likely to exceed the last with ideal weather and more cane planted. One recent prediction saw total cane at close to 120 million tonnes. Other producers in the region are also benefiting from the weather. The EU is expected to see a drop in the planted area for beet next year as farmers switch to other crops which will give a better return. Beet processors are already offering higher prices for beet in anticipation. Much can happen before decisions have to be made.

While raw sugar prices have faltered recently white sugar remains relatively firm hence the good white premium reached. At current levels all but the most inefficient and ancient refineries will make money. The tightness in whites has caught many by surprise. Shipping issues with high freight rates, surprisingly limited production from the largest refiners and total export bans from the likes of Algeria couple with an unexpected jump in demand has seen white prices rocket pulling the WP with them. Prices have receded along with  raws but the WP has been maintained to a greater degree.

As mentioned above the global investment fraternity has withdrawn their bullish horns recently seeing a global downturn impacting on commodity demand. Sugar is no exception with the funds net long position now probably below 40k lots. It would seem unlikely they will build a short position with residual longs maintaining their long-term positions. Conversely, they have the ability to buy huge volume if they so desire. For the moment the fundamental and macro picture remains mildly bearish – hence the recent drop in prices. However, much of the fundamentally bearish sentiment could change swiftly and dramatically. Energy prices could rocket if there is an escalation in the Russian/Ukraine war. The Indian monsoon could peter out. Therefore, a ‘what-if’ premium is likely to stop any further large deterioration in prices. The white sugar strength will also be seen as supportive. A unexpected rally could occur. Coffee jumped over 10% earlier this week seemingly on nothing. There is likely to be limited producer selling resting above the market until 20 cents. In reality, the markets may quieten as is often the case in July and August as traders, analyst and brokers take a break.