Aug 26 / Lívea Coda

Prices are on fire

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"Market sentiment is shifting, with short-term support – especially after the fires in Brazilian Center South – but no return to last December's price highs. Trade flows remain more comfortable than what was priced in the previous year"

Prices are on fire

  • Market sentiment is shifting, with short-term support – especially after the fires in Brazilian Center South – but no return to last December's price highs. Trade flows remain more comfortable than what was priced in the previous year.

  • Speculative positioning and Conab’s optimistic view were some of the reasons behind last week’s weakness. The fact that market is still waiting for TCH and crushing pace to show some correction also contributed to prices testing the 17.5c/lb floor.

  • However, talks of a sudden death were boosted by fires reported across the Center-South region, accelerating price-recovery back to 19 c/lb.

  • In this report we analyze some scenarios and take a change at pointing out some possible price range during the intercrop.

  • An important assumption is considering a slight increase to cane volumes in 25/26, justified by preliminary positive weather forecasts.

Market sentiment appears to be shifting. While fundamentals don’t indicate a tightness similar to 2023, the sweetener market framework is becoming increasingly supportive in the short term. However, prices are unlikely to return to the highs seen last December.

Firstly, speculative positioning had been comfortably on the short side until mid-last week, at least. Despite increasing discussions around a potential "sudden death" in Brazil's Center-South, current data shows the region’s resilience. Although strong TCH (tonnes of cane per hectare) and rapid harvesting are expected to start correcting soon, final figures are still anticipated to be higher than in 2021/22, the last year of sudden death. As a result, the fundamentals weren’t strong enough to trigger position shifts and price recovery, especially given the favorable weather conditions for cane and beet development in the Northern Hemisphere.

Image 1: Raw sugar prices monthly behaviour (c/lb)

Source: Refinitiv

Conab’s figures were not encouraging for prices either. The agency presented an extremely optimistic outlook. Despite revising its Center-South figures downward, they are still at the upper end of the market, projecting 626.17 Mt of cane and 42 Mt of sugar. Combined with a positive output from the North and Northeast regions, with 3.9 Mt of sugar, Brazil is expected to produce more of the sweetener than last year.

The stage was set for a bearish week, with prices testing the 17.52 c/lb level twice. In previous reports, we identified 17.5 c/lb as a crucial support level, below the Indian export parity, while Chinese arbitrage began to open in producing states, suggesting that some price recovery was likely. This expectation was further supported by a more bullish macroeconomic environment, with the possibility of the Fed’s interest rate cuts being priced in. However, on August 23, fires were reported across the Center-South region, accelerating the recovery and driving prices up. As a result, this week started with sugar trading back at 19 c/lb.

In addition, Conab’s area latest figures prompted us to revise our cane production estimate from 620 Mt to 614 Mt, leading to a reduction in sugar output from 41.3 Mt to 40.8 Mt. While this reduction directly impacts availability, it doesn’t suggest a deficit approaching the levels estimated by the end of 2023. On the contrary, the market appears to be relatively balanced.

However, considering that the fires could further compromise production, we’ve explored some scenarios. With 614 Mt of cane as our base case, what would happen to trade flows if the "sudden death" scenario worsened, fires continues to affect the region, and total cane production dropped to around 600 Mt?

Image 2: Total trade flows | Base case: 614Mt of cane (Mt tq)

Source: GreenPool, Hedgepoint

Alternatively, what if Conab’s estimates are closer to the region’s final figures, and we’re surprised by a healthier result, closer to 630 Mt?

It’s clear that the intercrop season would see price support in either case, but the range could vary significantly. If production falls to 600 Mt, with sugar output at 39.8 Mt, we estimate a possible price range of 19c/lb to 22c/lb, with the upper end likely reached during the intercrop. At 614 Mt, this range could drop by 1c/lb, settling between 18c/lb and 21c/lb. If the scenario turns more bearish, we might revert to the price range observed between June and mid-August, fluctuating between 17c/lb and 20c/lb. This projection is an educated guess, relying on a slight recovery during the 2025/26 season.

Image 3: Total trade flows | Bullish case: 600Mt of cane (Mt tq)

Source: GreenPool, Hedgepoint

Image 4: Total trade flows | Bearish case: 630Mt of cane (Mt tq)

Source: GreenPool, Hedgepoint

A better outcome from the region is possible for the next season. NOAA has revised the intensity of La Niña down to a neutral-negative level, suggesting more average weather during cane’s critical development window in the Center-South, which could lead to a more favorable result. Keeping our preliminary estimates at 620Mt, after the new season start we could see some price correction, being bearish for the May/25 and further contracts. Therefore, the spread structure reflects current fundamentals.

In Summary

Market sentiment is shifting, with short-term support but no return to last December's price highs. Trade flows are more comfortable than last year, and speculative positioning and Conab's optimism contributed to last week’s price weakness. The market is still awaiting adjustments in 24/25's TCH levels and crushing pace, which pushed prices to test the 17.5c/lb floor. However, reports of fires in the Center-South region quickly drove prices back to 19c/lb. We should keep in mind that the extent of these fires' impact is yet to be estimated, and that, although burnt, some cane might still be crushed, compromising only part of its productivity and sugar content. Therefore, although it contributes to our bullish scenario, we regard the 600Mt level with a certain skepticism.

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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