Aug 21 / Lívea Coda

Sugar and Ethanol Weekly Report - 2023 08 21

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"The market has been trading weather for some time, and last week was no different. Prices remained at a narrow range (23.7 to 24c/lb), but some discussions gained momentum."

We’ve got a weather market

  • Market has been trading weather news for a while now, and last week wasn’t so different. Prices kept within a tight range (23.7 to 24c/lb), but some discussions got stronger.

  • While there is a bearish force coming from the higher availability provided by Brazil, some rumors of above-average precipitation in the region for the coming days added to the bullish side of the equation.

  • Another important weather-related event was the confirmation from India’s Mereological Department (IMD) of a lower-than-expected monsoon. As a result, we decided to revise our figures.

  • We reduced our India’s export from 2.5Mt to 1.35Mt. This drop added to our expectations of a trade flow deficit in both Q1 and Q2 2024. Note that as it becomes difficult to see any exports being allowed by the start of the crop, we adjusted our export seasonality accordingly – sugar could start flowing out of the country in late February.

    The week was marked by ups and downs on sugar prices, but not an extremely relevant variation, as the range went from about 23.7 to 24.2 c/lb and back. While Center-South crushing remains positive, there is a bearish force preventing any strong uptrend in the short term, as discussed in previous reports. News on weather, on the other hand, seems to be siding with the bulls.

    Rumours of higher rainfall predicted to reach CS in the next 14 days could put a lid on the region’s excellent pace. Although this view has contributed to the 24 c/lb support, forecast models don’t seem to be in agreement. While Canadian and European are predicting more rain than average, GFS is still on the sector side. It appears to be a wait-and-see situation, and we should expect higher volatility depending on the evolution of forecasting models.

    Another important weather-related event was the confirmation from India’s Mereological Department (IMD) of a lower-than-expected monsoon. According to the agency, India is heading to its driest August in more than a century, ending the month with a significant deficit in the southern, western and central regions.

Image 1: 14-Day Precipitation Anomaly Forecast (% of normal)

Source: Agweather

Image 2: 14-Day Precipitation Anomaly Forecast (% of normal)

Source: Agweather

This adds fuel to the medium/long-term bullishness, as it seems to be getting a lot more difficult to expect a strong recovery in the country’s sugar production. Not only in total output but availability to the international market is bound to be restricted.

In our last report, we argued that the market is back considering between null to 2.5Mt. As a result, we decided to revise our figures. While we were optimistic about staying at the higher end of that range, the current outlook points out the need to be conservative. Domestic prices are high, and India’s government worries about stocks and food security. Therefore, being export quota’s a political decision, it becomes difficult to see any volume being allowed soon at the start of the crop. We changed our export seasonality accordingly – sugar could start flowing out of the country in late February.

 Image 3: India’s export revision (‘000t tq)

Source: Source: hEDGEpoint, ISMA, Green Pool

Besides the change in seasonality, we revised total exports down to 1.35Mt, from 2.5Mt. The main reason is that we believe that the poor precipitation won’t allow yields to recover fully, leaving the government less keen to put at risk food security, prioritizing restocking.
As a result, our base case trade flows, which already showed a deficit in both Q1 and Q2 2024, got more intense. This trend is extremely supportive of March contracts, in line with the deepening in the V23/H24 spread.

Image 4: India’s revision impact on global trade flows – before (left) and after (right)

Source: hEDGEpoint, Green Pool

In Summary

Market has been trading weather news for a while now, and last week wasn’t so different. Prices kept within a tight range (23.7 to 24c/lb), but some discussions got stronger.

While there is a bearish force coming from the higher availability provided by Brazil, some rumors of above-average precipitation in the region for the coming days added to the bullish side of the equation. Although there is still quite some uncertainty regarding a possible disruption in Center-South’s crushing, one thing has been confirmed: India is facing lower-than-average monsoon.

Therefore, the bulls found some breath, especially considering the medium/long term, as the market is not as optimistic as it was regarding India a couple of months ago.

Weekly Report — Sugar

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

Disclaimer

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