Sep 4 / Lívea Coda

Sugar and Ethanol Weekly Report - 2023 09 04

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"The decision to export is political, but the market remains favorable. As inflation in India has exceeded its Central Bank's target, it is natural to expect the government to take action. However, we must remember that sugar is not entirely to blame."

From a market view, India should export

  • Although market is scared about the possibility of no Indian exports, we should remain cautious regarding news and rumors: no official decision has been made.

  • Of course, higher inflation is an indication that the government might act – as it already has in other markets. However, sugar is not the main reason behind the rise in the food and overall CPI.

  • Lack of rain does raise a red flag in terms of availability, but it also helps support the market in a bullish bias. Compared to past crops, India does not have the incentive to import, but market keeps pointing out the need for, at least, reduced participation from the country.

  • Despite prices in INR/qtl being extremely high (3,800 INR/qtl), the devaluation of the INR guarantees a lower price in USD, at 460.55 USD/t, below the international market, with raws above 560 USD/t and white above 700 USD/t.

The decision to export is political, but the market remains supportive. In our last report we brought up India’s government key reason for a possible sugar exports ban: an unprecedented rise in its consumer price index (CPI) above their target. As inflation reached 7.4% YoY in July, and their Central Bank target is 4%, with lower and upper tolerance limits of 2% and 6%, respectively, it is natural to expect government to act.

However, it is fair to remember that sugar is not the one to blame. When analysing India’s YoY inflation rates per group, the main drivers of a higher food index were vegetables, with a 37.3% increase, together with spices, which rose 21.63%. Sugar and confectionery, on the other hand, rose by 3.75%. Of course, August monsoon results are not encouraging, and lower production could disturb domestic prices further. Still, much has been said and many rumours have taken a toll on prices – even the possibility of imports are being considered by a few. To try and figure out where the main risks are, and justify our current 1.3Mt export expectation, let’s compare current and past market outlooks.

Image 1: Current Prices M Grade (USD/t)

Source: Bloomberg, NCDEX, hEDGEpoint

During the 2015/16 and 16/17 crops, the country not only did not export, but also imported sugar to control domestic prices. From October 2015 to September 2017 the average price for Delhi, Muzaffar Nagar and Kolkatta reached 554 USD/t (3,670 INR/qtl), against the global market average of 374 USD/t for raw sugar and 468 USD /t for white. In this market, it is safe to say that there was plenty of encouragement for imports, and little for exports.

Image : Sugar Balance – India (Mt tq Oct-Sep)

Source: ISMA, AISTA, hEDGEpoint

Using simple math, India should keep exporting sugar. The country could benefit from current market situation and perspective. However, it is not that simple, and fundamentals such as weather, expected production, and stocks play an important role in policy making.

India is the biggest sugar consumer, being responsible for over 28Mt disappearance annually. It is known that the country’s government aims to keep at least 3-months consumption reserve. For 22/23 it would mean 7Mt, while for 23/24, 7.3Mt. So far, with what has been exported (6Mt) during the current season, stocks are at historically low values, at around 4Mt.

Even if India doesn’t export in 23/24, stocks won’t reach the “target”. However, given the current international market configuration, we believe that not only are imports off the table, but some exports might as well be allowed once stocks start piling up – it would be hard to prevent millers from taking a little advantage of sugar’s high prices.

It does not mean we are turning a blind eye to lower availability; in fact, we’ve been pledging the 31.4Mt for a while. Although rains were confirmed to be as low as they could have during August, we remain with our production unchanged – there is still some time until the beginning of the crop – and with our 1.3Mt export expectation.

Image 3: Raw Sugar Prices Frequency Analysis (USc/lb)

Source: Refinitiv, hEDGEpoint

Image 4: White Sugar Prices Frequency Analysis (USd/t)

Source: Refinitiv, hEDGEpoint

In Summary

Although market is scared about the possibility of no Indian exports, we should remain cautious regarding news and rumors: no official decision has been made.

Of course, higher inflation is an indication that the government might act – as it already has in other markets. However, sugar is not the main reason behind the rise in the food and overall CPI.

Lack of rain does raise a red flag in terms of availability, but it also helps support the market in a bullish bias. Compared to past crops, India does not have the incentive to import, but market keeps pointing out the need for, at least, reduced participation from the country.

Weekly Report — Sugar

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

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