Sep 17 / Lívea Coda

Supportive Scenario: macro, weather and delivery

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"As the raw sugar contract approaches expiry, it may experience a short-term boost as funds roll over their positions. This strength, however, is not solely driven by technical factors; fundamentals also play a role. The latest UNICA report revealed a lower-than-expected sugar mix, while the Center-South region continues to suffer from drought conditions. The strong white sugar delivery could pressure the white premium, particularly if India's export parity for the quality remains favorable."

Supportive Scenario: macro, weather and delivery

  • The sugar market started last week slowly, with participants waiting for the UNICA report, while drought in Center-South Brazil supported prices.

  • Macroeconomic factors turned more bullish midweek as U.S. inflation dropped, helping raw sugar prices rise.

  • The UNICA report revealed a lower-than-expected sugar mix (48.85%), contrary to forecasts of over 49%.

  • Brazil's Senate approved the "Combustíveis do Futuro" bill, raising future biofuel blend mandates, possibly boosting demand for ethanol.

  • Despite bullish biofuel developments, sugar prices still rely on Indian export parity, with global trade engagement expected at 20-21 c/lb.

  • White’s delivery was healthy, reflecting both a high white premium and an open white sugar Indian parity – a proxy for the tolling profit.

The market started slowly last week, with most participants cautiously awaiting the release of the UNICA report. Meanwhile, the overall environment continued to show signs of weakness, as the energy complex struggled to maintain its gains. Despite this, sugar remained somewhat insulated, supported by the ongoing drought in Center-South Brazil. During the first half of September, the region has experienced hot and dry conditions, with no relief in sight. Low relative humidity and high temperatures in key sugarcane-producing areas have sparked concerns about an increasing number of field fires.

Image 1: Brazilian precipitation anomaly (mm)

Source: INMET

As the week progressed, macroeconomic factors contributed to a more bullish outlook. The U.S. annual inflation rate dropped for the fifth consecutive month to 2.5%, falling below the market's forecast of 2.6%. Therefore, by Wednesday, raw sugar prices seemed to find support and began to rise. The release of the UNICA report the next day further bolstered market sentiment. While most figures aligned with expectations, the sugar mix came in surprisingly low. Many had anticipated the mix to be above 49% for the second half of August, but it reached only 48.85%.

Image 2: US – PCE Index (%)

Source: Bureau of Labor Statistics, Refinitiv

Regarding ethanol, the report didnt’ add much, and the key development worth mentinoning was the Brazilian Senate's approval of the "Combustíveis do Futuro" bill. Important provisions were maintained, including a mandate for up to 10% biogas in natural gas, though the Senate removed Petrobras' green diesel R5. The National Energy Policy Council (CNPE) will oversee biofuel blend increases, with biodiesel in diesel expected to reach 20% by 2030 and up to 25% by 2031. Ethanol in gasoline is set to increase to 35%. The bill also introduces targets for sustainable aviation fuel (SAF) use and greenhouse gas reductions in aviation fuel between 2027 and 2037.

If ethanol’s blending mandate is set to 30% for the 2025 calendar year, the 24/25 crop season would already be affected, with a 3% increase in anhydrous demand, from 8.4B liters to 8.6B liters. Thinking about 25/26, this changes would mean an even higher demand for anhydrous ethanol, potentially pressuring future stocks and creating more opportunities for investment in biofuels, particularly corn ethanol, whose share in total ethanol production is drastically increasing year-on-year.

This news may be seen as bullish, but biofuels still have a long way to go before impacting sugar prices. During the current intercrop season, biofuel stocks are expected to remain above or at average levels, suggesting that sugar prices have other potential support levels to test before hydrous prices. One key factor is Indian export parity. For India to actively engage in the global sugar trade, prices would need to reach 20-21 c/lb during Center-South’s intercrop season.

Image 3: White contract delivery (‘000t)

Source: Refinitiv, Hedgepoint

On the white’s market, the October contract expired, with a total of 544.6kt being delivered. This marks the second largest London delivery on record, behind December 2020 (618kt) and nearly the double of October 2022 (224kt). Three trading houses were matched against five deliverers, with a diverse range of origins, even Poland delivered. Nevertheless, Indian tolled sugar made up the largest portion delivered, accounting for 311.5 kt. It does make sense when considering past white premium level, which corrected from 140Usd/t to about 100 Usd/t, and that Indian white’s export parity has been open for a while now, at about 30 Usd/t considering current domestic prices. Although it might be perceived as bearish, the V/Z showed quite some strength in its final section, while December showed some resilience on its first trading day, closing at 524.1 Usd/t.

Image 4: White premium 10Y weekly seasonality (USd/t)

Source: Refinitiv, Hedgepoint


In Summary

As the raw sugar contract approaches expiry, it may experience a short-term boost as funds roll over their positions. This strength, however, is not solely driven by technical factors; fundamentals also play a role. The latest UNICA report revealed a lower-than-expected sugar mix, while the Center-South region continues to suffer from drought conditions. The strong white sugar delivery could pressure the white premium, particularly if India's export parity for the quality remains favorable.

Weekly Report — Sugar

Written by Lívea Coda
livea.coda@hedgepointglobal.com
Reviewed by Ignacio
ignacio.espinola@hedgepointglobal.com
www.hedgepointglobal.com

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