Jan 4 / Lívea Coda

Sugar and Ethanol Weekly Report - 2023 01 04

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"The lack of precipitation and higher temperatures in Center-South's cane-producing areas pose a threat if the pattern extends into January and February. Cane’s stem extension stage is particularly susceptible to drought risks, leading to a reduction in yield if stressed for a long period. Although it might signal a reduction in 24/25 expectations, it is far from a crop break, inducing price support but not a strong comeback."

All eyes are on weather

  • A short-term floor at 20c/lb was established following a significant market downturn prompted by the realization that Brazil has more raw material than initially anticipated.

  • Initial estimates for Brazil's 24/25 crop season are positive, projecting a potential of 640Mt, with a small correction in yields to be compensated by leftover cane (cana bisada). However, ongoing weather conditions and precipitation levels will require continuous monitoring.

  • Monthly spread behavior analysis indicates a flattening curve between July and October 2024 contracts, suggesting a current emphasis on higher availability. Persistent weather constraints could alter this market dynamic.

  • Cumulative precipitation data in cane-producing areas closely follows the average, with an exception in December when the index flattened, potentially posing a threat if the pattern extends into January and February.
The previous two weeks witnessed a restrained market atmosphere during the end-of-year festivities. Volume wasn't significant and prices remained in a tight range between 20.5 and 21.7c/lb. After a major meltdown following the realization that Brazil has more raw material than previously anticipated, 20c /lb has proven to be a short-term floor.

As we enter 2024, the bearish trend solidified, making it rather difficult to advocate a 28c/lb comeback. However, as is customary at the start of every year, weather might add volatility. Many houses have released their first estimates for 24/25 Brazilian Center-South and prospects are good. As discussed before, our first guess would be a small yield correction partially compensated by leftover cane (cana bisada), meaning that the country might produce 640Mt next year – almost as good as 23/24. However, as time goes by, and precipitation fails to maintain average levels, we might need to re-estimate. It is too soon to tell, but lost days were minimal in December’s second fortnight, allowing us to expect mills to have crushed as much as they could, reducing the amount of cane’s possible leftovers. Also, if persistent, the lack of rain might induce poorer development.

Image 1: Volume at Price Between 12/01/23 and 01/03/24(c/lb vs No. of Lots)

Source: Refinitiv, hEDGEpoint

Image 2: Lost Days Estimate per Fortnight in CS (No. days considering 5mm threshold)

Source: Bloomberg, hEDGEpoint

A potential decrease in Brazil's 2024/2025 crop season could lend support to sugar prices, particularly for the July and October 2024 contracts. Despite recent transactions occurring with reduced volume, an examination of monthly spread behavior reveals a flattening of the curve between these months. This suggests that the market continues to value higher availability, but is already monitoring crop conditions – March and May weekly appreciation has been lower than the July and October 2024 contracts. If weather conditions persistently constrain cane development, we might see a shift in the future curve structure.

Image 3: Spread Structure (c/lb)

Source: Refinitiv, hEDGEpoint

Up until now, the cumulative precipitation data indicates that 2023 has closely followed the average in crucial sugarcane-producing areas, except for December. During that month, the index flattened, approaching or falling below the anticipated levels. This pattern could pose a threat if it continues into January and February. Cane’s stem extension stage is particularly susceptible to drought risks, leading to a reduction in yield. Additionally, the water demand during this phase is at its highest. Combining the intense heat and lower precipitation seen so far, the yield correction could be sharper, restricting availability.

However, note that the situation is far more comfortable when compared to 2021-2022 precipitation patterns, especially given that January and February rains are expected to be slightly above and close to average. We will soon release our updated view, but it is safe to say we are not talking about a crop break, far from it actually, we are just adjusting expectations that it will not be as great as 23/24.

Image 4: Expected Temperature (ºC left) and Precipitation anomaly (in/day right) between January 3 and January 17.

Source: NOAA, hEDGEpoint

Image 5: Cumulative Precipitation (mm) – Ribeirão Preto | SP

Source: Bloomberg, hEDGEpoint

Image 6: Cumulative Precipitation (mm) – São José do Rio Preto | SP

Source: Bloomberg, hEDGEpoint

Image 7: Cumulative Precipitation (mm) – Araçatuba | SP

Source: Bloomberg, hEDGEpoint

Image 8: Cumulative Precipitation (mm) – Bauru | SP

Source: Bloomberg, hEDGEpoint

Image 9: Cumulative Precipitation (mm) – Presidente Prudente  | SP

Source: Bloomberg, hEDGEpoint

Image 10: Cumulative Precipitation (mm) – Araraquara | SP

Source: Bloomberg, hEDGEpoint

Image 11: Cumulative Precipitation (mm) – Mineiros | GO

Source: Bloomberg, hEDGEpoint

Image 12: Cumulative Precipitation (mm) – Triângulo Mineiro | MG

Source: Bloomberg, hEDGEpoint

Image 13: Cumulative Precipitation (mm) – Nova Alvorada do Sul | MS

Source: Bloomberg, hEDGEpoint

In Summary

A short-term floor at 20c/lb was established following a significant market downturn prompted by the realization that Brazil has more raw material than initially anticipated. Coupled with the initial estimates for Brazil's 24/25 crop season it is hard to believe in a strong comeback.

The lack of precipitation and higher temperatures in cane-producing areas pose a threat if the pattern extends into January and February. Cane’s stem extension stage is particularly susceptible to drought risks, leading to a reduction in yield if stressed for a long period. Although it might signal a reduction in 24/25 expectations, it is far from a crop break, inducing price support but not a strong comeback.

Weekly Report — Sugar

Written by Lívea Coda
[email protected]
Reviewed by Natália Gandolphi
[email protected]
www.hedgepointglobal.com

Disclaimer

This document has been prepared by hEDGEpoint Global Markets LLC and its affiliates ("HPGM") exclusively for informational and instructional purposes, without the purpose of creating obligations or commitments with third parties, and is not intended to promote an offer, or solicitation of an offer, to sell or buy any securities or investment products. HPGM and its associates expressly disclaim any use of the information contained herein that may result in direct or indirect damage of any kind. If you have any questions that are not resolved in the first instance of contact with the client ([email protected]), please contact our internal ombudsman channel ([email protected]) or 0800-878-8408 (for clients in Brazil only).

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