Over the past fortnight the market has seen rather more volatility than the previous couple of weeks. However, despite a rally to just shy of 18.50 prices have now fallen back and are, currently, unchanged from two weeks ago. During the period the July contract quietly expired with just over 130k tonnes delivered, all Brazilian, by just one seller (Viterra) to one buyer (Wilmar). The general consensus was the small delivery was bearish as the July expired at a fairly hefty discount of 26 points. The weakness of the spot month has now transferred to the October. Currently the Oct/March is at 33 point discount. Physical demand remain very poor and hence the spot moth discount in both New York and London. The main reason given for the low physical off-take is that freight rates are so high they are prohibiting the buyers who are continuing to use up stocks hoping that rates will weaken later in the year. While rates are high one does wonder whether global consumption is robust as some believe. The market did improve to its highest level since late February on some trade and speculative buying last week but the gains were short lived as it did not trigger any significant fund buying. Indeed, it was not long before prices were heading South as the funds stepped up their long liquidation triggered by action in other commodity markets. Improving weather across the grain regions of the US over the weekend saw grains/soya contracts take a tumble on Tuesday (US closed Monday) and continued into Wednesday. It has been a turbulent time in these markets of late after large gains were seen the previous week after the USDA released their latest report. Crude continues to firm and now well above pre-pandemic levels although OPEC’s inability to decide on whether to implement production increase has kept the market nervous over the past week. The concern of inflation continues to haunt the broader markets with the Dow falling from all-time highs this week.
Sugar fundamentals have taken a back-seat to the macro recently. Nevertheless, Brazil’s CS sugar production remains at the centre of attention even if it is not influencing prices currently. The rains of June have, as suspected, had limited impact on the cane which remains stressed. A new concerned appeared recently as a bout of much colder temperatures crossed much of Southern Brazil. Frosts were seen over three nights reaching up into Sao Paulo. Much chatter was heard on potential damage to the cane. Unlike coffee trees which can be terminally damaged by a sharp frost cane is rarely killed. However, a frost can stop the cane developing further and will also have an impact on the sugar content. A week after the cold weather mills are continuing to assess the damage but, the general consensus is that the damage was not a severe as initially feared. However, there is likely to be some consequences to the cane especially as much of it is stressed due to the dry weather. Unica released their first half of June figures a couple of weeks ago showing a total of 35 million tonnes crushed during the period resulting in 2.192 million tonnes of sugar which was rather less than expectations. Cumulative crush is now running 22 million tonnes below last season at 165.6 million tonnes and sugar 12% lower at 9.34 million tonnes. This drop has seen analysts reaching for the S&D spreadsheets with Czarnikow one of the first to drop their CS production estimate to 34.10 million tonnes. Tereos also implied they see production now down at around 34 million tonnes. Further lower estimates are likely over the next few weeks.
Elsewhere it is relatively quiet on the fundamentals side. India is in between harvests having produced 30.6 million tonnes in 2020/21 and gearing up to produce a little more next season. Currently, it is the monsoon season. It started in very robust fashion covering the whole country quickly with well above average rainfall. Since the middle of June the rain has become more sporadic and patchy. However, a pick-up in rains are forecast for the coming weeks and Indian forecasters are still expecting average rains for the monsoon for an, unprecedented, third year in a row. There has been much publicity about the Indian government’s ethanol programme but it is seen unlikely to have a marked impact on sugar production next season. This means, according to ISMA, that India will be an exporter again of 6 million tonnes or more for next season depending on price and potential subsidies from the Government. Whether a subsidy will be approved and, if so, at what level, remains to be seen. At over 18 cents some would argue the need for subsidies recedes. It would appear that India will, again, act as the filler of supply gaps left by Brazil and other exporters next season especially as the rainfall across the sugar regions of Thailand have been rather lacklustre recently suggesting cane production of between 80 and 90 million tonnes maybe optimistic although there is certainly time for things to improve.
The market is currently under the thumb of the macro which continues to exert rather more influence than many were expecting. The funds have resumed the liquidation of their long held bought position having rested for a week when prices rallied. They are also booking profits across other commodities. In the short term the market may come under further selling pressure. The market is, currently, in the middle of the range seen since early April. At below 16.50 prices are close to Brazilian ethanol parity. At above 18.50 prices are higher enough to see non-subsidised India sugar offered although, currently, there is little physical demand. Therefore, the down-side looks limited to Brazilian ethanol parity. The up-side is probably going to be dictated by Brazilian sugar production. Assuming total CS production does not drop to below 31-32 million tonnes then there will be enough Indian sugar available above 18.50 to plug supply gaps and limit any large increases in prices and should ensure prices remain below 20 cents. However, it will not be long before analysts might start to opine about the prospects for the Brazilian 2022/23 crop. US weather forecasters see a 66% chance of La Nina developing over the Northern hemisphere winter – this could impact on Brazilian rainfall which could impact on the cane. Obviously, it is far too early to make anything but vague productions but if Brazilian production is compromised again there might not be so much Indian stocks to export by then.
Contact the ADMISI Sugar Desk team:
Howard Jenkins, Kevin Watkins, and Steven Trigg
Phone: +44(0) 20 7716 8598
Email: admisi.sugar@admisi.com
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Risk Warning: Investments in Equities, Contracts for Difference (CFDs) in any instrument, Futures, Options, Derivatives and Foreign Exchange can fluctuate in value. Investors should therefore be aware that they may not realise the initial amount invested and may incur additional liabilities. These investments may be subject to above average financial risk of loss. Investors should consider their financial circumstances, investment experience and if it is appropriate to invest. If necessary, seek independent financial advice.
ADM Investor Services International Limited, registered in England No. 2547805, is authorised and regulated by the Financial Conduct Authority [FRN 148474] and is a member of the London Stock Exchange. Registered office: 3rd Floor, The Minster Building, 21 Mincing Lane, London EC3R 7AG.
A subsidiary of Archer Daniels Midland Company.
© 2021 ADM Investor Services International Limited.
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