Jan 22 / Lívea Coda

Sugar and Ethanol Weekly Report - 2024 01 22

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"With no changes to fundamentals, market might be performing a technical rebound. This movement might find some support in seasonal demand. "

Sugar’s late reaction and seasonal demand

  • Raw sugar prices approached the 50% Fibonacci retracement level in the past week, a rebound after a major decline. Although an expected movement, caution is advised as market fundamentals have not significantly changed.

  • Seasonally high demand during Ramadan festivities traditionally supports sugar prices this time of the year. Taking Indonesia as an example, a major importer, usually experiences an uptick in its imports during the first quarter.

  • Talks on India’s reservoirs are also comforting for the bullish trader, however, it is still too soon to peg what could happen until the next season cane development window.

  • Brazil's exceptional sugar production is keeping the market in a tight balance, contributing to limiting the current bullish strike. It may be a short-term reaction to seasonal demand’s movement rather than a reflection of a shift in market fundamentals.
Raw sugar prices reacted in the past week, getting closer to the 50% Fibonacci retracement level. Technically speaking, a rebound after a major meltdown is usually expected, however, we should remain cautious as fundamentals haven’t changed much.

Image 1: Sugar is moving back to 50% retracement

Source: Refinitiv, hEDGEpoint

As discussed in previous reports, market is standing at a tight balance. It is natural for prices to find support in seasonally high demand due to Ramadan festivities. Ramadan, the ninth month of the Islamic lunar calendar, carries profound religious importance for Muslims globally. The conclusion of Ramadan is celebrated with Eid al-Fitr, a joyous day featuring special prayers, feasting, and the exchange of gifts. An illustrative example of its impact on the sugar market is Indonesia, a prominent global sugar importer with an annual average of 5 Mt, which traditionally experiences an uptick during the first quarter. Indonesia key commercial partner, in terms of sugar is Thailand, responsible for around 40% of its total volume, followed by Brazil, with about 22%. This year, the lack of sweetener from its main partner, Thailand, and the disappointing results from other Northern Hemisphere countries will push higher demand for Center-South.

Some destinations that usually present an uptick due to higher demand, though not as relevant in terms of total volume, are Egypt and United Arabs Emirates. Those countries, located at Northeast Africa and the Middle East might face some extra challenges on top of lower availability due to the ongoing conflict at the Red Sea.

Image 2: Indonesia total sugar import seasonality (‘000t)

Source: Trade Map

Recent reports highlight concerns about the water levels in Indian reservoirs. The Central Water Commission of India reveals that, as of January 11, the overall levels across the country's 150 reservoirs stand at 57%, a dip from the ten-year average of 60%. Notably, the Southern Region emerges as a significant contributor to this decline, with only 56% of its capacity filled, compared to the ten-year average of 69%. It's worth noting that these figures were widely anticipated, given the particularly dry conditions experienced by Karnataka and Tamil Nadu during the monsoon season, directly impacting reservoir levels. This situation demands close monitoring, particularly as we approach the critical developmental window for crops, especially sugarcane, between June and August, but does not pose any threat to the 23/24 crop season in terms of both production, and exports – the latter being null.

Also about India, the country has produced 14.87Mt until January’s first fortnight, a 7% drop compared to last year. Maharashtra and Karnataka made explicit the adverse conditions cane fields had to withstand last summer, while Uttar Pradesh holds results up with a nearly 15% increase in its output. Nevertheless, Maharashtra farmers have reported better-than-expected cane harvest yields, adding to market production expectations and leaving us comfortable to keep our 31.85Mt estimate.

Image 3: Reservoirs status in India (%)

Source: Central Water Commission

However, let’s not lose sight that Brazil is having the best season it ever had.

With a record-crushing pace and excellent shipment – registering a record in December – Brazil is single-handedly keeping the market at a tight balance. Rains arrived down center-south and, although scattered, they support another good year in 24/25.

Therefore, the uptick we are seeing in sugar might be a short-term reaction to higher demand in a tight balance scenario, triggering some technical buying, but not reflecting the complete fundamentals. The 24c/lb seems to be a fair high, the 50% Fibonacci retracement. 

Image 4: Brazil’s lost days estimate (nª of days considering a 5mm threshold)

Source: Bloomberg, hEDGEpoint

In Summary

With no changes to fundamentals, market might be performing a technical rebound. This movement might find some support in seasonal demand.

However, we should keep in sight that Brazil seems to be doing more than fine and is in the game supplying through Northern Hemisphere’s absence until its new season.

Weekly Report — Sugar

Written by Lívea Coda
Reviewed by Natália Gandolphi


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