Aug 14 / Lívea Coda

Sugar and Ethanol Weekly Report - 2023 08 14

  Back to main blog page
"Concentrated rains, low stocks, and elections: Indian export quotas have never been so uncertain. Especially after ISMA reduced its harvest estimate to 31.6Mt, the market once again considered between none and 2.5Mt of exports to the country."

What if India is out of the table?

  • Prices fail to react to Brazilian CS expressive positive results during the week as market went back to discussing the possibility of no exports from India. Especially after ISMA adjusted their crop estimate down to 31.6Mt and the concentrated rains in some states, the Southeastern country’s availability hit the spotlight.

  • While it fueled concerns about a possible sugar shortage in Q1 and Q2 2024, it is not yet a consensus. We need to keep monitoring rains and India’s domestic prices as the decision is highly political: stocks are pressured.

  • In the short term, however, it is important to state that there is a bearish force as Brazilian CS pace is strong and there are rains predicted to happen in India. This might encourage some selling, especially with physical demand keen to wait and pushing cash discounts further.

  • Another trend worth assessing is China import’s behaviour. The country has reduced its import pace in the face of such a closed arbitrage.

    Last week started with sugar showing some strength and recovering to close to 24 c/lb. News such as the rice exports ban in India due to high domestic prices sounds worrisome for the sugar market, as the latter’s prices have also increased sharply due to lower stocks. Therefore, although the week was marked by Unica’s report bringing a strong fortnight result and a market consensus that Brazil will have more cane, uneven monsoon rains in the Southeast country keep adding to the bull side of the story.

Image 1: India Sugar Balance (‘000t)

Source: ISMA, AISTA, Green Pool, hEDGEpoint

Last week we discussed how trade flows changed given our latest Brazilian crop update, this week, we aim to show what could be the effects of no exports coming out of India during 23/24. Note that our base case suffered some changes from the last report as we updated many other countries, such as Mexico, China, and Thailand.

As base case we consider an optimistic view of India. With our unchanged estimates of 31.4Mt sugar production for 23/24, keeping stocks stable, the country would be able to export up to 2.5Mt. However, we believe that the government would wait for stocks to start building up before allowing any quota, meaning that anyone relying on it would have to wait until the end of Q1/Q2-24 to start seeing higher volumes of sugar available from the country.

Image 2: Base Case – Total Trade Flows (‘000t tq)

Source: hEDGEpoint, Green Pool

The idea that India might not export at all is the main bullish resource. Even though our base case considers some deficits in Q1-24 and Q2-24, they are not expressive but are enough to keep the V23/H24 spread negative. If India doesn’t export at all, the deficit might become an issue even considering two expressive CS crops in a row.

The first quarters of 2024 would be extremely bullish for sugar prices. The lack of Indian exports would combine with Thailand’s crop break and lead to over 1Mt deficit in both Q1 and Q2-24. However, we must be cautious as there is still time for Indian cane to develop. We should keep on monitoring the rains and expect to have a better idea of the crop by September’s end. Also, it is an election year, so any export decision is possible to be a political one.

Image 3: No India Exports – Total Trade Flows (‘000t tq)

Source: hEDGEpoint, Green Pool

As there is still much to unravel, this scenario doesn’t seem to be priced in. The H24/K24 spread is still highly strong and, in the case of two major consecutive deficits, we would expect a smoother behaviour. Current spread structure, therefore, has a higher match to our base case, but in order to anticipate market shifts we need to understand the main risks, and India’s government seems to have all the cards on its hands.

In the short term, however, it is important to state that there is a bearish force as Brazilian CS pace is strong and there are rains predicted to happen in India. This might encourage some selling, especially with physical demand keen to wait and pushing cash discounts further. 

Image 4: Sugar Cash Premium (Santos FOB – c/lb)

Source: Refinitiv, hEDGEpoint


In Summary

Prices fail to react to Brazilian CS expressive positive results during the week as market went back to discussing the possibility of no exports from India. Especially after ISMA released their new crop estimate down to 31.6Mt and the concentrated rains in some states, the Southeastern country’s availability hit the spotlight.

While it fueled concerns about a possible sugar shortage in Q1 and Q2 2024, it is not yet a consensus. We need to keep monitoring rains and India’s domestic prices as the decision is highly political: stocks are pressured.

Also, another trend worth accessing is China’s imports behaviour. The country has reduced its import pace in the face of such a closed arbitrage. With a marginal production recovery, it might be able to keep its presence in world trade flows reduced compared to previous years.

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).

To access this report, you need to be a subscriber.