Weekly Sugar Wrap for 21 May

After the volatility of last week the sugar markets have become becalmed with a much reduced price range and very disappointing trading volumes. The market did make an attempt to push back higher earlier in the week but the strength was fleeting and prices have spent much of the week 20 points either side of 17 cents. The structure remains weak in both markets with front two spreads in both raws and whites at a discount – hardly the recipe for a sustained rally. The macro has not helped the situation with most commodities trending lower on renewed fears of inflation hitting the stock markets hard as expectations of Fed interest rate rises increase. The funds, having built massive long positions across the commodity spectrum are taking some risk off.

This week saw the first ‘virtual’ sugar conference of the year with the ISO/Datagro looking at the current state of the sugar market. The general view of participants is that the market is, currently, well supplied with no tightness expected in the short term which explains the spot discounts at the moment. The concerns over the Brazilian CS cane crop due to dry weather and the large long position held by the funds is supporting the relatively high prices at the moment. A price range of 16.50 cents at Brazilian ethanol parity and 19 cents where Indian exports become viable without subsidy is seen as the current range although some would argue that Indian sales could be made at around 18.50. So, unless the macro turns particularly negative and the funds liquidate the market might remain range-bound. While most believe the large longer term funds are unlikely to relinquish their longs for the time being some see the Brazilian premium in the market, eventually, disappearing if the Brazilian harvest is not a ‘disaster’.

On the fundamental side the Indian Government announced yesterday that they are cutting the existing subsidy by over 31% to 4,000 rupees per tonne for the remainder of the season. While this will probably have little impact on the 500-600k tonnes that still remains to be sold of the 6 million tonne target for the current season it may indicate their thinking for next season. The government is undoubtable strapped for cash as the country continues to battle Covid. However, the government will be mindful that with reduced production in Brazil and only a modest gain in production from Thailand next season prices may remain relatively high and they can continue to export sugar with a lower subsidy. Nevertheless, they will need to export, at least, six million tonnes again having just produced around 31 million tonnes during the current season which is coming to a close. Additionally, many see internal consumption in India dropping again due to lock-down restrictions during their traditional wedding and festival season when, historically, sugar consumption spikes thereby adding to their stocks. With another bumper harvest expected next season the only way to maintain their stocks at a manageable level is to continue to export.

Conab the Brazilian government agency see the CS harvest hitting a crush of 574.8 million tonnes producing 35.8 million tonnes which is in line with several other current predictions. However, Datagro did suggest mills may, in the short term, increase ethanol production due to increasing prices and demand which may be borne out in the next Unica data for the first half of May. Elsewhere EU production is expected to increase by 800k tonnes in 2021/22 to 14.7 million tonnes. This is despite French farmers seeing late frosts devastate their planted beet plants. It would suggest they have replanted. Germany reported that their beet planted area is expected to 398k hectares an increase of 3.2% from last season. Now it is just up to the weather across the region as to where the final production ends. Recent weather has been beneficial. Thailand’s Mitr Phol analyst sees the countries cane production recovering by well over 20% to between 85-90 million tonnes next season due to better weather and higher prices. This should allow exports of between 5-6 million tonnes.

This morning the NY market has slipped to new lows (16.74) following the collapse in prices from 18.25 reached just ten days ago as the macro picture remains negative. Good scale down pricing from end users at these levels who are, surely, relieved that their patience is being rewarded. The funds are trimming their massive long positions in most agricultural commodities with prices having risen to a level well above demand in some cases. Sugar is probably a case in point with demand sluggish. Nevertheless, one reason the funds have bought is because of expectations of inflation which is now rising up the agenda with concerns US inflation will jump through the Fed’s expectations. The jury is out on the extent of the rise. Some are convinced inflation could become uncontrollable while other believe it will be a short term issue as the world slowly comes out of lock-down. In the meantime Sugar will continue to react to the macro picture  but is likely to do so in a relatively narrow trading range.