May 20 / Lívea Coda

Sugar and Ethanol Weekly Report - 2024 05 20

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"Center-South's robust production outlook, combined with other bearish factors such as Petrobras' leadership change and increased Chinese sugar planting, has pressured sugar prices down to a new range of 17.5-19.5 cents per pound. Despite bullish long-term risks from a potentially stronger La Niña, 2024 prices are unlikely to rise significantly."

Center-South had a strong start and sugar mix is surging!

  • Dry weather in the Center-South region since mid-April led to a strong start to the 24/25 season, with a 43.41% increase in cane crushing and sugar production rising to 2.6 Mt in April, compared to 23/24.

  • Compared to the 20/21 season (a crop with similar weather pattern), the 24/25 season achieved a record-high sugar mix despite lower Total Recoverable Sugar (TRS), making it explicit the increased capacity.

  • The bearish trend in sugar prices is reinforced by the change in leadership at Petrobras and its decision not to pass on import costs, as well as increased sugar planting in China, leading to higher expected output.

  • Going forward, sugar prices are anticipated to remain on a 17.5-19.5c/lb range, with potential long-term bullish risks from a possible strong La Niña affecting the 25/26 cane development in the Center-South region.

The weather in the Center-South region remains dry, with extremely low precipitation levels in key-producing areas since mid-April. This contributed to 24/25’s strong start, driven by contracted sugar and the need to deliver. Cane crushing increased by 43.41% in April compared to the 23/24 season. Sugar production also rose during the month, reaching 2.6 Mt, up from 1.5 Mt previously.

Interestingly, comparing these results with the 20/21 season, which had similar precipitation patterns, cane, and sugar volumes were higher in 20/21 than in 24/25 so far, as was the Total Recoverable Sugar (TRS). However, a notable trend in the current season is its record-high sugar mix achieved despite lower TRS, indicating that the sugar mix should indeed be higher.

Image 1: Lost Days (No. of Days)

Source: Bloomberg, Somar, Hedgepoint

Nevertheless, the increase in the index may be limited by the dry weather, as the cane quality, particularly towards the end of the season, can deteriorate. Additionally, despite recent investments in the crystallization process, the new installations might not be fully operational in the coming months. Therefore, we have revised our sugar mix expectations from 52% to 51.8%. This still represents an almost 3 percentage point increase over the 23/24 figures.

Image 2: Crushing per Fortnight (Mt)

Source: Unica, Hedgepoint

Despite a slightly lower sugar mix, the Center-South region is still expected to produce over 41 Mt during the 24/25 season, the second-best result in its history. This anticipation contributed to last week's sharp price correction for raw sugar, culminating in the lowest final settlement in over a year at 18.1 cents per pound.

Additional factors reinforced the bearish trend. In Brazil, the government replaced Petrobras CEO Jean Paul Prates with Magda Chambriard, the former head of the Agência Nacional de Petróleo (ANP), Brazil’s oil and gas regulator. A member of the new administration stated that Petrobras does not intend to pass on import costs to consumers, even with oil priced at $80 per barrel, triggering a significant decline in Petrobras shares. For the sugar market, this indicates that ethanol is even less likely to pose a competitive threat.


Image 3: Crop Estimates Summary

Source: Unica, Hedgepoint

Also on the bearish side, the China Sugar Association reported increased planting efficiency, providing an advantage over other crops and leading to a larger planting area for the 24/25 season, especially in beet-producing regions. Consequently, sugar output is expected to be higher next season, currently estimated at 11 Mt, which may result in its reduced participation in international trade in 2025.

With less than 200 kt of sugar nominated from Brazil to China, the Asian country may seem comfortable with what it has imported so far. However, local sources reported that the country purchased around 350kt as prices fell last week. Furthermore, we can expect its seasonality to be similar to last year, as this volume would take around 45 days to arrive in the country after shipping (if from Brazil). Additionally, Chinese import arbitrage has offered less support in the short term as prices had to approach 18c/lb to trigger purchases. Currently, considering only the ZCE, excluding premiums, the arbitration for Brazilian imports is closed and orbits at 17.5 c/lb.

Image 4: Total Imports - China ('000t - exc. Syrup and smmugling)

Source: CSA, Refinitiv, Greenpool, GSMM, hEDGEpoint

Combining these factors with the above-average expected monsoon in India and an expected healthy cane development in other Northern Hemisphere countries for the 24/25 crop, the 2024 sugar price average does not appear to have many reasons to rise. We might be entering a new range of 17.5-19.5 cents per pound, instead of the previous 20-22 cents per pound.

Meanwhile, the bullish risks are more long-term. With La Niña looming, a strong event could disrupt the 25/26 cane development in the Center-South region. This could support prices if the market starts pricing in potential supply tightness in 2025.

Image 5: ENSO Nino 3.4 ONI – El Niño, La Niña or Neutral

Source: IRI, Hedgepoint

In Summary

The Center-South region's dry weather since mid-April has led to a strong start for the 24/25 season, with a 43.41% increase in cane crushing and sugar production rising to 2.6 Mt in April. While this season's cane and sugar volumes are lower than the 20/21 season, it achieved a record-high sugar mix despite lower Total Recoverable Sugar (TRS). However, dry conditions may impact cane quality later, and new crystallization investments might not be fully operational soon, prompting a slight revision of sugar mix expectations from 52% to 51.8%, which would still guarantee the region’s second-best results.

This robust production outlook, combined with other bearish factors such as Petrobras' leadership change and increased Chinese sugar planting, has pressured sugar prices down to a new range of 17.5-19.5 cents per pound. Despite bullish long-term risks from a potentially stronger La Niña, 2024 prices are unlikely to rise significantly.

Weekly Report — Sugar

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

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