Weekly Sugar Wrap for 13 August

The past week has seen the sugar market rocket higher with the spot month hitting its highest level since late February and the H-22 contract pushing above 20 cents for the first time in over 4 ½ years. The main driver has been the deteriorating  prospects for Brazil’s CS crop due to the prolonged drought and the recent frost damage. The release of the latest Unica data for the second half of July was the catalyst for prices to rally over 100 points on Tuesday although it would seem the data was widely known to some well before the official release given prices had rallied over 60 points during the morning. In the event the initial data did not look too bad with over 46.5 million tonnes of cane crushed and 3.03 million tonnes of sugar produced during the fortnight period. However, it was the drop in the agricultural yields that probably had prices jumping. 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 that the frosts that hit large areas of the CS region have caused more damage than initially thought. Unica reported that mills had had to rearrange their harvest strategy to quickly harvest cane impacted by the cold weather which, normally, would have been crushed later in the season when yield might have been higher. The view is that yields will remain poor through to the end of the harvest which may see a very short tail this season. Once a crop starts to worsen it will, inevitably, never recover.

Even before the Unica data release analysts were lowering their expectations for Brazil’s CS. While StoneX lowered their estimate to around 34.6 million tonnes Wilmar remained the most pessimistic saying that total production will drop to below 30 million tonnes and could hit 28 million tonnes. Since the Unica report Czarnikow have revised their June estimate down nearly 5% from 34.1 to 32.5 million tonnes on a total crush of around 520 million tonnes. It is likely further estimates will be released over the next few weeks and all are, inevitable, going to be lower. Needless to say, it is still very difficult to make any accurate prediction but it would now appear that Wilmar’s early harvest prediction of 31 million tonnes, which was widely dismissed as too pessimistic at the time, may well be close to the truth. The concern is that their current prediction of 28 million tonnes turns out to be correct. The other concern is the impact that the dry and cold weather may have on the next Brazilian cane crop. If the rainfall is good during the summer then the cane could quickly improve. Cane is very resilient and can make miraculous recovery from adverse growing conditions if the weather improves. What is rather more difficult to gauge is the impact on the cane from the frosts as the extreme frosts that were witnessed at the beginning of July are rare. Nevertheless, if above average rainfall is received, much of the damage could be mitigated. Therefore, all will be watching for any signs that the La Nina weather phenomenon will develop again. Currently, it is thought that La Nina may develop during the Autumn and could continue through the winter. However, currently, it is thought it will be mild.

All fundamental thoughts have centred, understandable, around Brazil over the past few weeks with limited news from elsewhere. The usual summer lull and generally limited news at this time of year as many cane crops are inter-harvest are the main reasons. The monsoon in India appears to be a bit sporadic but, after two good previous monsoons, it is unlikely to have a huge impact on their cane. EU weather has, also, been a bit mixed but generally rainfall has been adequate and considerably better than last year. The ban on Neonicotinoids is causing some disease concerns across some countries where it remains banned but it appears to remain very regional.

The spot months in both markets remain at large discounts to the rest of the board suggesting limited near-by physical demand. However, many suggest this is purely because of the very high freight rates which have deterred buyers and consumption is still improving after the 18 month of global lock-downs. If this is the case then supply shortage could be seen later this year/early next and it why the H-22 expiry in both NY and London is at a sizable premium to the rest of the board. However, the WP remains surprisingly weak with even the HH WP still valued below 60.00 which is below all refiners costs.

The macro continues to dictate market direction although, rightly so, fundamentals do trump. The increases in Delta Covid cases across Asia and, in particular, China had spooked the markets late last week. Crude saw a large collapse with WTI dropping 12% over the course of the week although support was found again at $65.00 on demand concerns. The pandemic would seem far from over in many parts of the world with the likes of the UK appearing to be cocooned.

Today in Sugar prices have made new highs for the move and look to be heading for 20 cents basis the front month and over 20.50 for H-22. It is now somewhat inevitable that a deficit in production over demand will be seen next season. From a 1-2 million tonnes surplus predicted several months ago it is likely a 2-3 million tonne deficit is now on the cards which could increase further. Some will argue that Indian stocks can plug this deficit as they did this season. The one thing that does look likely is that the Indian government will not need to offer a subsidy for exports next season which will be a relief to other exports and the Indian government.