Sugar Market Report for 20 October

Good morning,

The market continued its slide yesterday as the fund liquidation continued. Prices dropped to their lowest level since early August (basis H-22) as the structure continued to weaken as well. The market had opened unchanged but soon started to slid making new lows by late morning. There was a slight improvement on some light speculative short covering before prices started to crumble again. The market remained under pressure through to the close although prices did manage to pull off the lows in late trading but it was another poor performance. The HK dropped another 3 points to end at +18 while the KN lost 6 points to settle at +14. In London the front spread held up reasonably well gaining nearly $2 to end at +7.90. However, the HK lost $2 to end just above flat. This meant the HH WP dropped to 76.60 while the KK WP improved to just over 80.00. it was probably somewhat inevitable the funds would continue to liquidate and with end-user pricing very much on a scale down basis prices slumped again.

It is probably not surprising the funds are cutting longs after the market became range-bound and failed to break higher multiple times. The funds have held their longs for some time and with the up-side looking limited they have, obviously, decided to book profits and deploy funds elsewhere. The rains across Brazil’s CS have also added to the bearish sentiment. The weakness of the BRL is also not helping sentiment dropping over 1% yesterday to settle at 5.585 weakest since late April.  Late rains across India and Thailand are also boosting prospects for their cane crops with the next harvest imminent. Now prices have fallen over 8% in just over a week it will be interesting to see whether it stimulate fresh physical buying. Freight rates are also slipping which might also encourage buyers although they still remain high.

This morning the market opened 14 points firmer on some light market on opening buying. However, the gains soon stalled and are currently around 12-13 higher. The HK and KN are around unchanged at +18 and +15 respectively. In early London trading the ZH is a tad weaker at +7.10 while the HK is firmer at +2.10. The macro is mixed this morning with crude and distillates weaker while grains/soya are slightly firmer. The USD Index is slightly firmer. As mentioned the BRL ended weaker again last night. The large drop in prices over the past week has now brought levels down towards Brazilian ethanol parity and a long way away from producer selling especially Indian sugar which will be needed to plug supply gaps until the next Brazilian harvest. Whether the lows have been reached remains to be seen and will depend on whether the funds have more to sell. As of the last COT they were just under 160k net long. Since then they may have covered another 30-40 k lots. They are likely to remain long but often spread their liquidation over 3 sessions so further weakness maybe seen today.