Weekly Sugar Wrap for 12 March

This week has seen the sugar markets tumble earlier on political and economic chaos in Brazil but then recover to somewhere near the middle of the range for the month so far. The macro has been the main price driver this week. The BRL fell to its lowest level against the USD since May last year and just a tad below its all-time low which, eventually, saw the market react with prices dropping through 16 cents and to their lowest level since the middle of February and wiping out all the March-21 inspired gains. This was seen as a good opportunity for end users to price having got well behind with their fixing as the market improved nearly 350 points on the spot month since the beginning of the year when prices rocketed higher at the end of February. They still have more to do and will be nervous given the huge pricing done by producers and will be wary of the possibility of another squeeze on the May-21 expiry. Therefore, it was never that likely a wholesale collapse in prices would have been seen especially as the funds, while not active buyers recently, are content to continue to maintain their longs.

The weakness of the BRL was triggered when it was announced that former President Luiz Inacio Lula da Silva several convictions for corruption had been annulled by Brazil’s Supreme Court restoring his political rights. This could enable the ex-President to run in next year’s Presidential election which spooked the Brazilian markets. The annulments of the charges were because the Federal Court of Curitiba which ruled on his conviction did not have jurisdiction. The country’s attorney general has promised to appeal against the high court judge’s decision although a separate vote by the Supreme Court could uphold the decision. Of course, much can happen in Brazilian politics before the next election but if Lula does run against President Jair Bolsonaro in 2022 it will make for an intriguing fight. Hard left against hard right. Bolsonaro has not endeared himself to the Brazilian population with his very casual attitude to the Covid pandemic which continues to have a very heavy impact on the country. With two such divisive figures in the frame for President the emergence of a centrist candidate would make the election even more intriguing.

Aside from the political turmoil in Brazil their next harvest will start, officially, at the beginning of April. There is still much debate on the amount of cane that will be crushed. The dry weather which allowed a long and successful crush last season will have taken its toll on the cane but to what extent is debateable and only time will tell. Currently, total crush is estimated at between 565 – 586 million tonnes with total production at between 36-36.7 million tonnes down from the record 38.2 million tonnes last harvest. With Archer Consulting estimating a record 80 % of Brazilian exports are fixed for the coming season it is likely the sugar/ethanol split will remain around last season’s average of 46.5/53.5 despite domestic ethanol prices improving. Currently, sugar still pays better. Mills priced a lot at much lower levels than seen currently when the BRL collapsed in April/May last year so prices would have to collapse significantly for them to buy back hedges – something that looks unlikely at the moment.

The Thai harvest is hobbling to a very disappointing end with sugar production unlikely to be much more than 7.5 million tonnes the lowest production since 2009/10 and nearly 50% below its record production just two seasons ago. The drop in production is well documented and expected after the cane was hit hard by prolonged drought and farmers growing more lucrative crops. The biggest question is whether production can bounce back next season. The weather has been considerable better and sugar prices have improved but enough to encourage more plantings remains to be seen. India was expected to step in to cover the Thai export destinations but is likely to struggling to reach the 6 million tonne target due to shipping issues and lack of containers.

The market appears to be settling into a range after the volatility of the past month. Currently, support is seen below 16 cents while resistance is seen above 16.50. While a break out is inevitable which way is less clear. The macro will continue to be a large influence but it is unlikely the funds will liquidate. Traders will be aware that a similar rally could developing as the May expiry draws closer but it is likely the buyers have taken, at least, some action to mitigate this scenario. In the meantime the market remains in limbo.

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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