Aug 12 / Lívea Coda

Sumarizing a volatile week

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"The sugar market has slowed recently due to weaker fundamentals making it hard to compete with more volatile assets, such as cocoa and coffee. While recent macroeconomic corrections have stabilized, key monitoring points include potential Chinese sugar purchases, concerns about frosts and fires in Brazil, and India's continued export restrictions. Additionally, improved beet yields in Russia, favorable weather in India and a persistently high TCH in Brazilian CS adds to the potential surplus in 24/25."

Sumarizing a volatile week

  • The sugar market has slowed, leading to milder trader interest, making it more vulnerable to external factors. Weaker BRL has been a major bearish factor, shielding the sweetener from some broader macroeconomic factors like weak U.S. jobs data and the dollar's decline at the beginning of last week.

  • However, recent macroeconomic corrections have stabilized by the week’s end, with the BRL and dollar index recovering, easing some selling pressure on commodities.

  • Key factors to watch include potential Chinese sugar purchases and concerns about fires and frosts in Brazil’s Center-South region, which could affect future crop yields.

  • India's continued export restrictions adds to the support side, while positive beet yields in Russia contribute to the market's current dynamics, suggesting a potential surplus if favorable weather continues.

The recent slowness in the sugar market has caused a noticeable decline in traders’ interest, especially compared to June figures, when volume breached 100k. In this context, it was only natural for sugar to be affected by the broader adverse macroeconomic developments over the past two weeks. The release of poor U.S. jobs data for July by the Bureau of Labor Statistics indicated a slowing economy, which triggered increased selling pressure in U.S. and other major equity markets, driving bond prices higher and lowering some borrowing rates. Most traders now expect the Federal Reserve to cut interest rates by at least 25 basis points in its September meeting. Although the dollar's decline would typically support commodities, as seen in the grains market, sugar fundamentals remain weak. Additionally, with Brazil being its key supplier, the ongoing devaluation of the BRL remains a significant bearish factor. Therefore, other markets such as Coffee, Cocoa and Grains offer a more thrilling experience.

Nevertheless, as the days went by, some of these macro trend corrected. After touching 5.88, the BRL moved back to 5.65 BRL/USD. Meanwhile, the Dolar index also showed some recovery, easing the selloff and allowing commodities to move back to their fundamentally-driven trading levels.

Image 1: Sugar didn’t respond to US currency moves

Source: Refinitiv

In terms of the sugar market, there are some worth monitoring events that might offer some support to prices in the coming days. One notable development is that as prices dropped below 18 cents per pound, the import parity in China’s producing states nearly opened, meaning that non-producers were already seeing a profitable level. This shift, coupled with China's slower buying pace, has fueled rumors that the country purchased 180kt of raw sugar over the past week. Although it might offer some short-term support, China was already expected to buy during Q3, according to seasonality – we anticipated nearly 900kt to be bought before the end of the season – therefore, the trend does not represent changes to fundamentals.

On the supportive side, the outlook of potential frosts in the Center-South region, following reported fires on Thursday, raises concerns about the remainder of this crop and the next season. The full extent of the fires is still unknown, but the western region of São Paulo state – particularly around Guapiaçu, Mendonça, and Araçatuba – was affected. These areas were also at risk of frost over the weekend, and during this week, further intensifying worries.

Image 2: Total Imports - China ('000t - exc. Syrup and smuggling)

Source: GSMN, CSA, Refinitiv, Greenpool, hEDGEpoint.

According to Climatempo, frost could affect the cane area in the southwest of Paraná, the southern half of Mato Grosso do Sul, and the central-south of São Paulo. However, the expected damage was restricted, as expected, with the main impact being the burning of leaves in areas that had not yet been harvested, as the frosts weren’t intense or widespread. Additionally, they are not expected to last for several consecutive days in these regions but may be back on August 13th and 14th.

As a result, the recent recovery of sugar prices to 18.5 cents per pound fits the ongoing discussions. Not only has the macroeconomic environment stabilized, but the market also gained fresh topics to focus on. In addition to the previously mentioned factors, India was also brough up during last week. On Thursday, India's Food and Commerce Ministry announced it would continue restricting sugar exports to ensure adequate domestic supply and support the country's ethanol production goals. Although this development doesn't significantly alter the known scenario, any news from India at this time of year tends to stir the market and impact prices.

Image 3: Frost risk on the dawn of August 13 (left) and 14 (right) in CS Brazil

Source: CPTEC, INPE

On the bearish side, several countries are contributing to the expected recovery in the Northern Hemisphere during the 24/25 season. For example, Russia's beet test results have been notably positive. Although spring frosts negatively impacted sowing in central Russia, the region's yield has improved by 38% compared to last year, raising the country's total yield to 19.2 mt/ha – an 11% increase over the 23/24 season. If favorable weather conditions continue, Russia could achieve a sugar production level of 6.85Mt.

Market needs to factor in all the news, but one thing remains true: we are heading towards another year of surplus, especially if weather remains favourable.

In Summary

The sugar market has slowed recently due to weaker fundamentals making it hard to compete with more volatile assets, such as cocoa and coffee. While recent macroeconomic corrections have stabilized, key monitoring points include potential Chinese sugar purchases, concerns about frosts and fires in Brazil, and India's continued export restrictions. Additionally, improved beet yields in Russia, favorable weather in India and a persistently high TCH in Brazilian CS adds to the potential surplus in 24/25.


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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