Jun 17 / Lívea Coda

Sugar and Ethanol Weekly Report - 2024 06 17

  Back to main blog page

"Last week, raw sugar prices were driven by speculation, particularly in response to Friday’s Unica report. Despite investments, the sugar mix level was surprisingly lower than last year, and TRS was worse than expected due to immature and leftover cane crushing. However, the fundamentals remain largely unchanged, with Brazil still on track for its second-best year maintaining a tight price range. However, weather remains the biggest source of volatility; any significant deviation from an average-precipitation forecast could disrupt future crop developments and alter the current price range."

Brazil could be lower, what about it?

  • Last week's raw sugar prices were influenced by speculation and anticipation of a bullish outlook before Friday's Unica report. The biggest surprise was the lower-than-expected sugar mix level, despite investments in crystallization.

  • Even with a sugar mix variation between 51.7% and 51%, total sugar output would only vary slightly (42 to 41.5 million tons), maintaining Brazil's status as a key supplier.

  • Prices have remained within the range established in early May, with a perceived price floor around 18 c/lb. Speculation of Chinese buying arises when prices approach this level, but China’s reduced need for imports suggests a closer alignment with ZCE levels (17-17.5 c/lb).

  • Key market drivers are weather-related, with short-term weather in Brazil, ENSO developments, and Northern Hemisphere crop conditions playing a crucial role.

Last week, raw prices were influenced by speculation, especially reacting to Friday’s Unica report. The market anticipated a more bullish outlook before the report release, with prices rising from Tuesday to Thursday (19.59 c/lb) but dipping slightly on Friday (19.46 c/lb). The biggest surprise was the sugar mix level, below last year, despite investments in crystallization suggesting it should have been higher. Additionally, the ATR (agricultural yield) was worse than expected, due to the crushing of both bisada (leftover) and immature cane.


Image 1: The difference between a 51.7% and 51% sugar mix has minimal impact on trade flows ('000t tq)

Source: Refinitiv, Hedgepoint

Considering the fundamentals, not much has changed. Whether the sugar mix is 51.7% or 51%, the total sugar output would only vary slightly between 42 and 41.5 million tons. This means Brazil would still have its second-best year and remain a key supplier in the short to medium term, supporting the recent tight price range. Adding to this outlook, May saw strong export results, and the Center-South region has strong export nominations for June. The devaluation of the Brazilian real also boosts the region’s participation in international trade flows.

Image 2: IBRL devaluation is another source of incentive to exports

Source: Refinitiv, Hedgepoint


Despite experiencing some fluctuations, prices have remained within the range established in early May. As previously mentioned, the current price floor is perceived to be around 18 c/lb. This level represents a significant resistance point, as regions in China, particularly non-producers, may still be inclined to import, even with a premium. Each time the market approaches this level, rumors of Chinese buying emerge. However, fundamentally, China’s reduced need for imports would push import arbitrage closer to the ZCE level without a premium, currently at 17-17.5 c/lb. This is also seen as the maximum upside for ethanol prices in Brazil.

As the Brazilian intercrop period approaches, the international market’s reliance on the Northern Hemisphere's supply increases. Consequently, the market must incentivize sugar exports from that region. At current prices, this would mean an increase to around 21 c/lb to stimulate Indian exports, and make our 1.5Mt expectation reality. However, these prices might slightly decrease as India builds up its stocks and domestic prices begin to adjust. If weather is average, we would probably be talking to an upside towards 20c/lb during the CS intercrop.

Image 3: Raw Sugar Prices (c/lb)

Source: Refinitiv, Hedgepoint

For prices to stay within these ranges, the weather needs to be "average." We might see some changes as future rainfall trends become clearer. Key points to monitor include:

  1.  Short-term weather in Brazil: Drier conditions could increase sucrose content but damage late-season cane, making it difficult to achieve a higher sugar mix.

  2. 2ENSO developments: An active La Niña during the Center-South’s summer could impact the 25/26 season, particularly if it is very strong, though this climate event generally has little correlation with precipitation in the region. For more details, refer to our report on La Niña.

  3.  Northern Hemisphere’s crop development: Weather significantly influences this as well, with the current monsoon season affecting India's potential output.

It's important to note that most key drivers are weather-related, suggesting that although rather dull currently, it is an uncertain market going forward.


Therefore, news like a worse-than-expected monsoon in central-northern India tends to have a bullish impact on sugar prices. However, unless there is a tangible effect or at least strong confirmation, these impacts may dissipate in the short term since they do not alter the current fundamentals. Most impacts are likely to be seen in the 2025 contracts, as Brazil is expected to have another excellent result in 2024.

In Summary

Last week, raw sugar prices were driven by speculation, particularly in response to Friday’s Unica report. Despite investments, the sugar mix level was surprisingly lower than last year, and TRS was worse than expected due to immature and leftover cane crushing. However, the fundamentals remain largely unchanged, with Brazil still on track for its second-best year maintaining a tight price range. However, weather remains the biggest source of volatility; any significant deviation from an average-precipitation forecast could disrupt future crop developments and alter the current price range.

Weekly Report — Sugar

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

Disclaimer

This document has been prepared by Hedgepoint Global Markets LLC and its affiliates (“HPGM”) solely for informational and instructional purposes, without the purpose of instituting obligations or commitments to third parties, nor is it intended to promote an offer, or solicitation of an offer of sale or purchase relating to any securities, commodities interests or investment products. Hedgepoint Commodities LLC (“HPC”), a wholly owned entity of HPGM, is an Introducing Broker and a registered member of the National Futures Association. The trading of commodities interests such as futures, options, and swaps involves substantial risk of loss and may not be suitable for all investors.  Past performance is not necessarily indicative of future results. Customers should rely on their own independent judgement and outside advisors before entering in any transaction that are introduced by the firm. HPGM and its associates expressly disclaim any use of the information contained herein that directly or indirectly result in damages or damages of any kind. In case of questions not resolved by the first instance of customer contact (client.services@hedgepointglobal.com), please contact our internal ombudsman channel (ombudsman@hedgepointglobal.com) or 0800-878- 8408/ouvidoria@hedgepointglobal.com (only for customers in Brazil).

To access this report, you need to be a subscriber.