Sugar Market Report for 11 August

The market rocketed yesterday to a four and half year high on Unica data which showed sugar production dented by the combined impact of dry and cold weather. The report’s content appeared to have been leaked early with the market opening 16 points higher before slowly gaining over the rest of the morning and early afternoon. By the time US traders got to their desks the market had gained nearly 50 points and had smoothly sailed through 19 cents in good volume. A large buy stop was triggered just above 19.30 which saw prices spike over 40 points in less than a minute before dropping back nearly as quickly. Prices did ease more back to the stop level where support was found. Prices then continued their gains ending the day 112 points higher basis the spot month the biggest one day gain for several years and more than the 100 point rally at the end of February. Unsurprisingly, given the fund buying, the VH gained 19 points to end at -35 while the HK improved 15 points to +105 with raw tightness seen manifesting itself later this year and early next. In London the gains were not as great with the structure barely changed. The VZ ended slightly higher at -19.00 while the ZH was also $1.50 better at -6.30. This meant the WP plunged lower again with the VV WP dropping to its lowest levels for many years at 36.30 while the HH WP settling around 53.90 hardly a level to encourage refiners to make white sugar. The market had been expecting a rally to develop for some time given the dire warning coming from Brazil over the state of the CS crop. As usual timing is tricky to judge but yesterday was the day that the market woke up to the perilous situation in Brazil. It might be argued that the one-day move was over done but as the funds dived in they were met with limited scale up selling with producers well priced especially against V-21.

The widely anticipated Unica harvest data for the second half of July was, on first glance, not hugely disastrous. However, closer inspection of the data revealed concerns for not only the current crop but the next as well. Further comment that the frost damage will become more apparent over the next couple of months also added fuel to the overall concerns. The crush for the period reached 46.69 million tonnes resulting in 3.034 million tonnes on a split of 46.43/64.97. A Platts survey had seen an expected production of over 3.6 million tonnes. However, it was the drop in the agricultural yields that probably had the most impact on prices. On a sample of 68 mills production dropped to 73.7 tons per hectare which is nearly a 18% drop from last season. It would appear the frosts, which hit parts of the sugar cane regions in early July, have had more of an impact than previously thought with mills having to change their harvest strategy due to the frost damage. Total sugar production estimates have been steadily dropping over the past few weeks and it is likely more cuts will be seen soon. It would seem that Wilmar’s early season estimate of 30-31 million tonne production may turn out to be accurate.

This morning the market opened 7 points firmer on some light follow-through buying after the very strong close last night. However, prices have subsequently fallen back after the early buying dried up. Currently, prices are holding around 4-5 points lower. The VH is 1 points better at -36 while the HK is also 1 point better at +106. In London the VZ is firmer at -17.30 while the ZH is unchanged at -6.20. The macro is a generally positive picture with most commodities higher. The USD Index is also firmer reaching its highest level since early April. Now the funds have returned to sugar aggressively on the buy side further gains are likely to be seen although whether the highs of yesterday will be breached remains to be seen. Fundamentally, it would seem highly unlikely the Brazilian CS crop will see any resurgence and the news will get worse over the coming weeks. It is also important to note that there is growing concerns over the prospects for the next CS cane crop with new cane getting hit badly in some areas by the frosts. Much will depend on the weather over the next 7-8 months. Good rains will undoubtably help the cane but with chatter about an El Nina developing there will be concerns the dry weather may persist. However, physical demand remains very muted with the spot months in both markets at large discounts. The WP has collapsed although probably exaggerated yesterday by NY rally and may correct slightly over the next day or so. Nevertheless, with HH WP at below 55.00 there is no incentive for refiners to make white sugar at the moment. High freight rates and shortage of containers continue to dissuade buyers. Additionally, Indian exporters will be keen to sell stocks as H-22 nears 20 cents. It would now seem unlikely they will be able to plug the gaps left by the lower Brazilian output but the government will be pleased to sell excess stocks and will now see no need for any export subsidies for next season which will be a relief to the government and other producers.