Apr 22 / Lívea Coda

Sugar and Ethanol Weekly Report - 2024 04 22

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"Last week started amidst a bearish macroeconomic environment for commodities driven by Middle East conflict escalation and concerns over the US economy, heightening market risk perception. The week was also marked by the white sugar May contract expiry, settling at $615/t with a notable 314kt delivery, mainly from the UAE, India, Brazil, and surprisingly, Poland and China. "

Macro and whites delivery, signs of a bearish market

  • The beginning of last week was characterized by bearish macroeconomic conditions, driven by Middle East conflict escalation and concerns over the US economy, increasing market risk perception.

  • The delay in Federal Reserve rate cuts strengthened the dollar, creating challenges for commodities, notably markets with weak fundamentals, such as sugar.

  • Emerging countries, like Brazil, faced challenges, with a 4% depreciation of the Real in April, boosting export returns despite corrections in sugar prices and, therefore, adding to the bearish trend.

  • The week also saw significant activity in the sugar market, marked by the white sugar May contract expiry at $615/t and a notable delivery of 314kt, predominantly from the UAE, India, Brazil, Poland, and China, with the latter two making their first recent appearances as suppliers.

Last week started with a bearish macroeconomic environment. The conflict escalation in the Middle East, coupled with concerns regarding the US CPI results, heightened risk perception in the market, aligning with the trend observed since the beginning of 2024. US Improving US Treasury yields might create further barriers for investors to add riskier assets to their portfolios

The idea that the Federal Reserve will delay rate cuts boosted the dollar's strength, creating a more daunting environment for bullish commodity players, particularly in markets like sugar where fundamentals are not supportive.

Another result of this bearish macro environment is the challenge some emerging countries face. For instance, the Brazilian Real depreciated by approximately 4% in April. This depreciation translates to higher returns for exports, contributing to maintaining a healthy export rhythm even with some corrections to sugar prices.

Image 1: Dollar Index

Source: Refinitiv, hEDGEpoint

Image 2: US - Treasury Yields (%)

Source: Refinitiv, Hedgepoint

Apart from the macroeconomic backdrop, the week was marked by the white sugar May contract expiry. The final settlement price was 615 USD/t, and the spread between May and August contracts closed at an inverse of 35 USD/t. A total of 314kt was delivered, marking the highest level since at least 2021. Most of the volume was delivered by the UAE, with significant contributions also from India and Brazil. Notably, this expiry was the first appearance of Poland and China among the suppliers in recent years – quite intriguing participation!

Image 3: White Sugar Delivery – May/K Contract (‘000t)

Source: ICE, Hedgepoint

Regarding Poland, the country's delivery might be a direct result of cheap Ukrainian sugar and the need to dump some volume to support prices. As discussed in previous reports, following the European Commission's removal of tariffs on Ukrainian sugar, imports surged to over 400kt in 22/23 and are anticipated to rise further to 650kt by 23/24, undercutting EU domestic sugar prices. This development has sparked protests across Europe, from concerned producers, particulary in France and Poland. However, the EU has extended its temporary free trade agreement with Ukraine until June 2025, with some safeguards. With a potentially higher influx of sugar imports and domestic price corrections, the region could increase its contribution to the global sugar supply, making its first appearance in recent years on an expiry delivery.

China did buy raw sugar back in December when prices allowed an open import arbitrage in their non-producing states, estimated at 20.5 c/lb. Consequently, Chinese customs reported the highest volume of imports entering the country during January and February, which provided a floor for raw sugar prices in the market. As China's crop cycle accelerates and considering their refining capacity, it is not surprising that traders may seek to capitalize on current white sugar prices, especially with fundamentals suggesting a potential correction ahead.

Optimistic forecasts for sugar production in the Northern Hemisphere for the 24/25 season, a region known to supply mainly whites, are reinforcing the current bearish trend. The August contract has failed to rebound to pre-May expiry levels and remains significantly lower than the 750 USD/t recorded at the end of 2023. Anticipation of above-average monsoon conditions in India, along with favorable cane development prospects in other regions, contributes to the general expectation of increased sugar availability. This outlook persists despite a reduced contribution from Brazil, a major player in raw sugar production. Given this bearish sentiment, supported by strong backwardation in the white sugar curve, current prices may present an opportunity for suppliers.

Image 4: White Sugar Spread USD/t

Source: Reuters, Hedgepoint


Consequently, we expect a modest surplus in the global sugar balance for the 2024/25 season, estimated at around 500kt. This projection directly impacts trade flows, particularly in terms of white sugar. In contrast to previous years, when several key sugar-producing regions in the Northern Hemisphere experienced crop failures, trade flows for whites are anticipated to remain relatively balanced for the remainder of 2024 and the beginning of 2025, with a reduced surplus of approximately 400kt.

Image 5: White Sugar Trade Flows (‘000t tq)

Source: Green Pool, Hedgepoint


In Summary

Last week started amidst a bearish macroeconomic environment for commodities driven by Middle East conflict escalation and concerns over the US economy, heightening market risk perception. The delay in the Fed’s rate cuts strengthened the dollar, challenging commodities, particularly those like sugar with unsupportive fundamentals. This environment also impacted emerging countries like Brazil, where the Real depreciated by 4%, boosting export returns despite corrections in sugar prices.

The week was also marked by the white sugar May contract expiry, settling at $615/t with a notable 314kt delivery, mainly from the UAE, India, Brazil, and surprisingly, Poland and China. China's earlier raw sugar purchases and expected production increases signal potential market corrections ahead. Optimistic forecasts for Northern Hemisphere sugar production in 2024/25 are reinforcing bearish trends, with a projected modest surplus of 500kt.

Compared to previous years, the white’s trade flows are estimated to be much more comfortable, meaning that current prices may present an opportunity for suppliers.

Weekly Report — Sugar

Written by Lívea Coda
livea.coda@hedgepointglobal.com
Reviewed by Laleska Moda
laleska.moda@hedgepointglobal.com
www.hedgepointglobal.com

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