Jul 8 / Lívea Coda

Support on a bearish market

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"The upcoming UNICA report is vital for gauging the season's outlook; if the sugar mix stays below 50%, surpassing a 51% cumulative level will be difficult, potentially heightening market concerns. Despite this, it is unlikely the sugar mix will drop to 50%, indicating a worst-case scenario, ceteris paribus."

Support on a bearish market

  • Despite robust July contract deliveries, sugar prices rebounded and stayed above 20 c/lb, driven mostly by concerns over Center-South production numbers.

  • The lack of rain has led to pessimism about achieving the anticipated sugar mix, prompting analysts to revise projections and making the upcoming UNICA report crucial for understanding price trends.

  • While Brazil's reduced rainfall is the main bullish factor, favorable monsoon progress, downgraded La Niña intensity, improving weather in Thailand, and optimistic EU yields are key factors to monitor for 2025 contracts.

  • Sugar prices remain favorable, with a significant premium over biofuel, and no anticipated change in mills' prioritization, though cane quality remains a risk.

Despite a robust delivery for the July contract, sugar prices registered an astonishing rebound, keeping its gains and remaining above the 20 c/lb level during last week, a shorter one due to the 4th of July holyday in the US. Driven by technical factors, and a price recovery in the energy sector, sugar’s strength was primarily rooted within its own market, outperforming a US dollar recovery. The recent movement is largely attributed to concerns over Center-South production numbers.

The lack of rain has added to the pessimism regarding the country's ability to achieve the previously anticipated sugar mix. Although the last UNICA report was somewhat in line with market expectations, many analysts felt compelled to revise their mix projections after another fortnight with figures lower than 50%. We revised our figures at the beginning of June to 51.2% and believe that this value is still achievable if, in June’s second fortnight, the regions breaches the 50% sugar mix level, making UNICA’s report monitoring essential to understand price trend movements.

Image 1:Lost days per fortnight estimates (nº of days)

Source: SOMAR, Bloomberg, Hedgepoint

While there are other news to monitor, such as India’s monsoon’s development and weather in Thailand, Brazil is currently the main bullish force and, revisions to its expected output can trigger more radical price movements. However, for sugar production to fall below 41 Mt, adding pressure to trade flows, Center-South’s sugar mix needs to drop below 50.4% for 24/25. To take away 1Mt, what would tighten availability and thus add support to sugar prices, sugar mix need to fall to 50%.

Image 2: Total trade flow considering 51.2% sugar mix, thus 41.5Mt of sugar (‘000 tq)

Source: Green Pool Hedgepoint

Image 3: Total trade flow considering 50% sugar mix, thus 40.6Mt of sugar (‘000 tq)

Source: Green Pool Hedgepoint

Prices remain favorable for sugar despite higher demand for hydrous ethanol and domestic mills' sales reaching 2020 levels. Currently, sugar prices (20.15c/lb) offer a 540-point premium over the biofuel B3 contract (14.7c/lb). This premium increases to 600 points when polarization and cash premiums are considered (21c/lb vs. 15.1c/lb for the B3 contract plus Cbios). Consequently, there is no anticipated change in mills' prioritization, with cane quality being the only risk to the sugar mix at present.

The lack of rain and poorer cane development have been cited as the main reasons for the lower mix so far. Many in the market are also concerned about end-of-season results. However, cane yields aren't as bad as feared, with April and May results representing the second-best cumulative values on record.

Image 4: Sugar and hydrous parity (c/lb)

Source: Refinitiv, Bloomberg, Hedgepoint

The next UNICA report will be crucial in providing insight into what to expect for the rest of the season. If the sugar mix remains below 50%, achieving an above 51% cumulative level will be challenging. This does not imply a change in mills' decisions, as previously discussed, but it might increase market apprehension. We currently see it as highly unlikely for the end-of-season sugar mix to drop to 50%, meaning the stress case presented in the graph below would be the worst-case scenario, ceteris paribus. Therefore, while the beginning of 2025 may be tight, it does not compare to the expected deficit maket priced last year for the 23/24 year, and thus, prices are not expected to return to previous levels.

While we await new developments in the Center-South region, it is important to monitor key factors influencing the 2025 contracts:

  • the monsoon is progressing well,
  • La Niña's intensity has been revised down,
  • weather conditions in Thailand are expected to improve,
  • MARS remains optimistic about EU yields, and
  • China is expected to have increased availability.

In this context, market concerns about Brazilian production due to reduced rainfall appear to be the only factor supporting prices in an otherwise bearish market.

In Summary

The upcoming UNICA report is vital for gauging the season's outlook; if the sugar mix stays below 50%, surpassing a 51% cumulative level will be difficult, potentially heightening market concerns. Despite this, it is unlikely the sugar mix will drop to 50%, indicating a worst-case scenario, ceteris paribus. While monitoring key factors for 2025 contracts like the monsoon, La Niña, and weather in Thailand, Brazil's reduced rainfall remains the primary factor supporting sugar prices in an otherwise bearish market.

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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