Weekly Sugar Wrap for 10 June 2022

Over the last month the volatility in the sugar market has remained high as prices rocketed above 20 cents again but then has slowly slid lower since. Raw sugar prices had rocketed higher over a four day period rallying from a six week low of 18.30 to hit 20.24 as the funds bought and limited selling was found until above the magic 20 cent level. However, although prices hovered above the level for nearly a week, settlement above 20 cents was never achieved and, eventually, prices dropped slowly lower. As of today prices have retreated around 130 points from the highs. The initial strength was on several factors none on their own probably enough to get prices jumping. There was a bizarre chatter that frost was about to strike across the Brazilian sugar and coffee regions despite a frost never being registered as early in the year. It was probably the lingering picture of frost damaged cane from last season which did not hit until July that got the bulls excited. The bullish sentiment prevailed during the NY sugar week which is no surprise as it happens every year. Nevertheless, the bullishness was, to a certain extent,  based on lowering estimates for Brazil’s production because of increasing ethanol demand and lower yields.  A rather technically negative island reversal was seen earlier this week which saw prices drop back to their lowest levels in a month.

Brazil and India remain at the top of the fundamental news agenda. Over the past month India has got themselves back at the top of the producer charts replacing Brazil for only the second time as they surpass 35 million tonnes by the end of May and are expected to produce a massive total of just over 36 million tonnes by the time the last mill packs up for the season. Bear in mind, at the beginning of the crush even the most optimistic analysts thought that 32 million tonnes was only possible at a pinch. Nevertheless, despite this huge production the Government decided to cap exports for the season to 10 million tonnes. While, initially, seen as bullish some questioned whether Indian was ever going the export 10 million tonnes anyway. Other saw the decree as bullish because the mechanism to export after 1^st June was so complicated mills would not bother to export. Eventually, it was seen as bearish because the maths suggested exports would pass 10 million anyway and the Government was probably going to allow an extra million tonnes to be exported. Looking further forward the monsoon has started. Although a couple of days early it has spluttered and stalled since with rainfall some 40% of average year on year. However, Indian forecasters are optimistic that rainfall will increase as will the country coverage during the second half of June. If this is the case then another enormous cane crop could be seen in 2022/23 – cane planting are higher than this time last year – and a similar amount of sugar produced. It is thought exports will be allowed soon after the start of next season.

Brazil has seen slow start to their 2022/23 campaign as mills waited as long as possible for the cane to recover from the months of dry weather last year. The amount of cane crushed was down as was the amount of sugar because more cane was used for ethanol production and the ATR was lower. Data was crunched and analysts concluded that the crush would never catch up and was doomed to a lower production of the miserly 32 million tonnes last season. However, as of this afternoon, when Unica released their second half of May harvest data things maybe changing. The data will have caused analysts to be grabbing their calculators as the amount crushed and sugar produced was higher than expected as was, crucially, the sugar/ethanol split. It is still early days but it would seem that catch-up is now the game to watch. It has weighed on prices late this afternoon. Additionally, President Bolsonaro is still bullying Petrobras into not increasing fuel prices. Replacing the CEO twice seems to have done the trick although crude prices have not moved significantly lately. The latest idea is to reduce the state ICMS tax which in turn will bring down the price of ethanol there by lowering ethanol parity. The bill needs to be passed by the Senate which is not a foregone conclusion by any means which could be sometime next week. While the bills has not been passed it does seem as if the market has factored it being approved. It has also been raining across the CS which may have hampered crush operations but will help the cane and bodes well for later in the season. It probably will not be long before someone opines on the prospects for the 2023/24 Brazilian CS crop which is probably likely to be rather higher than 32 million tonnes.

The wider macro picture has deteriorated recently as the global economy stutters after the pandemic and the Russia/Ukraine war have wreaked havoc. Food inflation remains high although the United Nations food inflation index actually flattened slightly in May. Nevertheless, while the war continues it is likely food inflation will remain high. Sugar prices look unlikely to collapse from here with a Brazilian premium still being maintained. The London market has been particularly strong recently surprising many. No one seems to be able to pinpoint the reason the Q-22 rallied to its highest level since October 2016 but a combination of limited availability of deliverable sugar (Indian sugars unable to be delivered due to export cap) limited production with several refineries on restricted capacity and/or export bans (Algeria) or better than expected consumption. We suspect it is a combination of all plus a fairly illiquid market and some aggressive trade house buying. Prices are, currently, slipping back and the highs maybe have been seen. Sugar is likely to remain volatile while all eyes remain on Brazil and the mills catch-up game and Bolsonaro’s election game.