Weekly Sugar Wrap for 28 January 2022

The sugar markets have continued to remain volatile over the past three weeks as geopolitical concerns replace pandemic fears. Earlier in the month prices dived to their lowest level since 22^nd July 2021 as the funds exited longs and started to increase their gross shorts. They cut their net long position to around 38k lots their smallest long position since around June 2020 as fund managers judged the upside to be rather more limited than, possibly, the downside. The move had been somewhat exaggerated by rather thin scale down end-user buying who, although cautious, were probably relived they had an opportunity to price at levels they had hoped for but, probably, not expected back in November when prices surged above 20 cents. Once the fund selling dried up prices recovered and eventually pushed up above 19 cents. However, fresh selling was waiting at the resistance levels hit before Christmas and prices have slowly slid lower over the past 10 days.

Fundamental news continues to become more bearish since the beginning of the year with production expectations improving while demand remains rather muted as end-users eye the weakening structure further down the board. The Indian and Thai harvests continue apace. Indian total production expectations is slowly creeping higher as the cane crush get to around half way. Currently, total production may reach 32 million tonnes despite around 3 million tonnes being diverted to ethanol production. This is some 1.5 million tonnes more than ISMA’s last estimate and above the 31 million tonnes produced last year. As is often the case this estimate may creep higher as the harvest progresses. As of a week ago the Thai crush had reached 36.8 million tonnes producing 3.7 million tonnes of sugar both around 30% higher than this time last year. Currently, analysts see total sugar production at just below or above 10 million tonnes which would be around 25% higher than last season which, one should remember, was the worst in over a decade. It does look as if sugar is beginning to suffer from its usual boom and bust scenario when higher prices encourages farmers to grow more cane or beet. The market has been pretty buoyant since early last year when prices spiked to just shy of 19 cents in February. This has sparked increasing production in the EU, UK, Pakistan and Russia. Undoubtably, weather has played a large part in this global production increase. Triple good monsoons across India has guaranteed another huge cane crop. Good rains across Thailand have alleviated the drought that hit their 2020/21 crop so badly. EU weather has reverted to normal after a very dry 2020 summer. However, the biggest turnaround in weather conditions has been seen in Brazil. Over a year of virtually no rain left the cane fields parched and the cane stressed and near to death in many regions. However, since September, the rains have returned admittedly rather timidly at first slowly replenishing the soil moisture levels. Recently, there has deluge of rain across the largest cane state of Sao Paulo and more rains are forecast for, at least, the next ten days. The threat of La Nina causing the dry conditions to resume has not materialised – it seems to have concentrated its efforts lower down the continent. After producing only 32 million tonnes of sugar during last harvest from 522 million tonnes many thought the cane would struggle to recover. While there has, undoubtably, been some residual damage analysts are starting to increase their expectations for the harvest which starts in April. Currently, some are now seeing total cane above 560 million tonnes which could produce around 34 million tonnes of sugar. Totals could increase further as the harvest edges nearer.

All the talk of increasing production has now translated into the real possibility that a small surplus of production over demand may now be seen for the current 2021/22 season. The largest surplus published so far is 600k tonnes by CovrigAnalytics but it is likely to be followed by more bearish estimates over the coming weeks. This means chatter of prices returning to 20 cents and above have virtually disappeared while a drop back to the lows of earlier this month (17.60) looks feasible. India sales appear to have plugged sales gaps left by low Brazilian availability with end buyers now probably able to wait until the next Brazilian crop.

Needless to say in these very turbulent times nothing is certain. Geopolitical concerns are likely to headline for the time being as Putin struts along the Ukraine boarder. Energy prices will remain firm but with the USD being the destination of safety commodity prices are being hit. What happens next is far from clear which only the very brave or foolhardy will try to second guess. However, away from the Ukraine energy prices are likely to remain near 14 year highs and inflation is not going to drop back anytime soon so sugar prices will find some macro support. The funds have a small net long position which will limit their potential selling unless the bigger funds decide to go short. While not inconceivable chatter of commodity super-cycles led by crude topping $100 next year is probably enough to deter them.