Weekly Sugar Wrap for 5 November

The past fortnight has been a dull affair in sugar with the average daily trading volume in New York for the past ten sessions just 73.5k lots with just one session when the volume crept over 100k lots. Prices have improved after suffering a 9% collapse as funds decided to cut their longs when prices dropped below 19.50. Two sessions of selling saw prices drop to their lowest level since late September. After some consolidation at these lower levels the buyers eventually emerged when they became confident that the funds had finished their selling. At one point prices were just over 1 cents off the October lows but have, essentially been in a range, albeit slightly higher, over the past nine sessions. Despite the flat price improvement the spot month premium has continued to drop away from +40 to a low of +22 although some support is beginning to be seen at these lower levels. With a dearth of fresh fundamental news direction has been heavily influenced by the macro and especially crude. Over the past two weeks crude has reached new multi-year highs with WTI hitting its highest level since November 2014 but has now fallen back with prices, currently, below $80.00. This was the catalysts to drag sugar prices off the lows especially with Brazil’s Petrobras increasing gasoline prices which was, obviously, seen a positive for ethanol prices and production. However, the USD has improved recently. The USD Index is back at its highest level since the middle of October a level not seen in a year. Increasing interest rates and the Fed’s easing of monetary policy has brought in the buying. This strength appears to have been enough to stifle the sugar market from attempting to reach 20 cents.

As mentioned above there has been a scarcity of new fundamental news and what there has been has been more confirmation of what is already in the market. Unica’s data for the first half of October was worse than had been expected and did see prices improve. The crush for the period was 19.7 million tonnes which produced 1.15 million tonnes of sugar. The split moved in favour of ethanol (39.11/60.89) which will have not been a huge surprise given the rising price of Brazilian gasoline. This means by the middle of October the cumulative crush is just under 10 % lower year on year while sugar production is 12.5% down. Second half October data will be released next week and, undoubtably, will show another slow down as the season comes to an end. Ironically, it is the amount of rain that is curbing activities. It would now seem total production will limp to no more than 32 million tonnes down six million tonnes compared with the record production last season. The rain continues across the main sugar regions of the CS helping to replenish soil moisture levels. Despite the return of the rains after months of their absence it has not had analysts significantly marking up their estimates for next season. The Brazilian consultancy Datagro have taken a pragmatic approach to their first estimate saying the see the total crush between 530 and 565 million tonnes and total sugar production at between 31.6 and 33.7 million tonnes slightly higher than earlier estimates from Alvean and Czarnikow.

The Indian harvest is underway in many areas. ISMA have cut their total production estimate by 500k tonnes to 30.5 million tonnes predicting that more cane will be used for ethanol production. It is unlikely that analysts will be cutting their estimates for the time being until more data is available. After exporting 7 million tonnes last season another 6 million tonnes is hoped to be exported this season. This without an export subsidy and with more competition and issues. Thailand will be a rather bigger competitor than last season when their sugar production was the worst for many years. Additionally, two of India’s lucrative markets may not be able to import as much as last season. Political turmoil in Afghanistan and currency issues in Sri Lanka may mean Indian exporters will be looking for other destinations.

One thing that may help exporters across the globe is dropping freight rates. After months of rising freight rates which has deterred end destination buyers who have been using existing stocks there has been a recent drop in dry rates across the board. This week the Baltic Exchange’s dry bulk sea freight index dropped to its lowest level in five months and expectations are that they may fall further. Whether this stimulates the physical market and sparks some well over-due off-take remains to be seen. It will be interesting to see what the appetite is to take delivery of the December London white sugar contract which expiries on the 15^th November. Most white sugar is shipped in containers but with breakbulk rates falling some trade houses may look to source white sugar from the tape. The ZH spread did improve to over +$11.00 earlier this week but has, subsequently, slipped back to around +$3.50 currently. The open interest is just under 22k lots with seven trading sessions to go so it is a bit earlier to make predictions on total tonnage. Chatter is that the majority of the sugar delivered will be Indian with Brazil and Guatemalan making up the mix.

World food prices rose for a third quarter in October to reach a fresh 10 year high. Agricultural commodities have risen steadily over the past year with several weather issues hampering production but mainly on the back of strong demand as the world comes out of the pandemic lack-down. Sugar is an important element of the index and suggests that the funds are likely to maintain a long term bought position in sugar. They have recently cut their net long position down to around 110k lots after hitting a recent peak of just shy of 200k lots in the middle of August when prices were at their highest level since early 2017. Therefore, it maybe the case that, barring a unforeseen catastrophic break-down of the macro, they may not reduce their long position too much more. However, they may need more bullish fundamental news to significantly increase their position. This possibly means the sugar market will remain range-bound for the time being. Brazilian ethanol parity is not too far below current levels while Indian (and Thai) exporters will start to get interested if prices approach 21 cents. The aforementioned drop in freight rates may be the catalyst into stimulating demand for which all sectors of the business will be thankful.