Weekly Sugar Wrap for 9 April

Over the past couple of weeks the sugar market has made a tentative bounce off the lows of the year but the weakening of the spot month spreads in both markets is the standout feature.  At the time of the last report the NY market has flirted with 15 cents but had held above the level. Since then prices broke the 15 cent level dropping to their lowest level since before Christmas. A triple bottom just below 14.70 has been enough to stop the flat price deterioration and prices are, currently back at the levels of late March. However, the weakening of the structure has continued with the KN dropping to a small discount. The current fund roll is exacerbating the weakness but it would seem very unlikely we will now see anything like the huge premium the March contract reached in front of its expiry. In London the collapse of the front month spread has been more dramatic falling from over a $15 premium in mid-March to its, current, $5.50 discount. It would appear there is little appetite to take delivery as the shorts exit or roll positions further forward. Chatter that white sugar taken up against March is still unsold suggests demand has fallen. India subsidised exports appear to have plugged the gaps left by the poor Thai production. The continuing battle with the Corona virus across many parts of the world, despite the vaccine roll-out, is continuing to impact on consumption at a time when many had expected a recovery.

The Thai harvest has finished. 7.57 million tonnes of sugar were produced some 700k tonnes less than last season and nearly half of their record production just three seasons ago. While the final figure was slightly more than many had feared a couple month ago it was poor and has left a big gap in the market. The big question now is whether production will bounce back in 2021/22. The weather and prices have improved but whether it is enough to persuade farmers to plant cane instead of other cash crops remains to be seen. Nevertheless, assuming the drought conditions do not return it is likely a larger cane crop will be crushed next season. The Indian harvest continues but is now beginning to wind-down. Total production might not be much more than 30 million tonnes as good quantities have gone to ethanol production. However, there is some concern over Indian domestic consumption with the country still in lock-down. The summer and wedding season is approaching but with strict restrictions still in place it is unlikely that consumption will improve until later in the year. This means India will be adding to their sugar stocks which will cause the government more headaches next season. It was reported that some mills had approached the Government to subsidise another 2 million tonnes of exports which, unsurprisingly, seems to have fallen on deaf ears. There must be big question marks over whether the Government will have the will or cash to subsidise exports again in 2021/22.

The Brazilian CS crush officially started at the beginning of April. This year it is off to a slow start and it will be several weeks before any meaningful data emerges. The cane, undoubtable, suffered from the dry weather last year but to what extent remains unclear. General consensus is total sugar production will be around 36 million tonnes. However, Archer Consultancy, this week, put total production at 35 million tonnes from a cane crop of 574 million tonnes. Ethanol prices have dropped recently as the pandemic continues to hit the country very hard. Therefore, mills will continue to concentrate on sugar production, as they did last season, so it would seem the determining factor to the amount of sugar produced will be purely determined by the amount of cane available to crush.

One region where production could drop this year is across the EU. The region has been beset with problems recently. The banning of neonicotinoid pesticides caused huge disease problems last season not helped by adverse weather. While there has been a partial lifting of the ban on neonicotinoids in some countries low prices has meant that the planted area is likely to drop again this year. Recently, another problem hit French beet growers. Unseasonal cold weather is reported to have caused huge damage to the newly plants beet. The beet plants had just stated to emerge from the ground when frost hit and has caused, according to some, up to 10% of the planted area to have been destroyed which was already to be expected to be 6% lower than last year. While there is time to replant but this will depend on seed availability and costs. In the UK farmers are turning away from beet as they say they cannot make money as they argue with British Sugar for higher payments for their beet. It will not be long before total planted areas across the EU are released and they are likely to be disappointing.

The up-surge in Covid cases across the world has hit the optimism of earlier in the year that the world would soon be back on its feet and economies would start to expand. This has seen the funds cut back on their huge long positions across virtually all commodities. However, with the United Nations food index increasing again in March for the 10^th consecutive month and reaching its highest level since June 2014 there is still much concern over inflation and, in particular, food inflation. Chatter of a commodity super-cycle developing has diminished recently but some analysts are still suggesting mini-cycles in certain commodities may develop. Sugar has fallen considerably from the highs reached back in February but there are reasons to believe prices may be bottoming out. Nevertheless, uncertainty stalks the market. A small surplus in production over demand is still pencilled in for next season but there is much that could change the situation. It would not take much of a drop in expected production across major producers to change the equation. Therefore, for the time being, prices may have reached a level where the downside is limited.