Sep 24 / Lívea Coda

Brazilian crop keeps getting smaller

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"About 400 thousand hectares of cane were affected by fires in Center-South Brazil, lowering quality and increasing costs. Our estimates for the region’s sugar mix estimate was reduced from 49.1% to 48.6%, and cane harvest expectations were downgraded from 614 Mt to 610 Mt, leading to a lower sugar production of 39.6 Mt, a 700 kt decline from our previous number. This reduction should tighten trade flows and is already affecting market positioning. "

Brazilian crop keeps getting smaller

  • A year ago, Brazil's Center-South crop was expected to have much higher sugar output, but this year’s fires and adverse weather have led to continued lowering expectations.

  • Hedgepoint’s sugar mix estimate has been revised down from 49.1% to 48.6%, a significant drop from initial forecasts of around 52%.

  • Total Cane Harvest (TCH) expectations were downgraded from an 8.9% correction to 9.5%, lowering cane estimates from 614 Mt to 610 Mt.

  • Sugar production estimates have decreased from 40.3 Mt to 39.6 Mt, resulting in fewer exports and tighter trade flows.

  • A 1.3 Mt deficit is projected from Q3 2024 to Q3 2025, primarily during the Brazilian intercrop, with potential price support above Indian export parity.

About a year ago, the headline of this report told a different story. At that time, the progress of the Brazilian Center-South crop indicated a much higher output than originally expected. However, this year, fires and adverse weather conditions have forced us, along with many other market analysts, to repeatedly lower our expectations. Similarly, the Northern Hemisphere also tell a different tale than last year, acting more on the bearish side, many countries are set to a partial recovery. In this report, we will discuss some of the key changes to our estimates.

Talking about CS, CTC estimates that about 400 thousand hectares were affected by recent fires, of which 60% were older cane, and 40% of total affected area were "ready to harvest", thus its effects will be mostly felt by the mix. The major impact is a decline in raw material quality and purity, affecting efficiency and productivity, requiring more treatments like fertilizers and pesticides, which drive up costs. This trend is boosted by the fact that fires compromise harvest optimization.

Image 1: Center-South’s fire focus

Source: INPE, reference satellite – AQUA (afternoon)

The only positive aspect is a slight increase in TRS, though reducing sugar content should still remain significant. As a result, we’ve adjusted our sugar mix downward. Looking at the mix seasonality, it’s clear that it has passed its peak, and the best-case scenario now would be a plateau, bringing the end-of-season mix down from 49.1% to 48.6%. This is a stark contrast to the initial market estimates, which were close to 52% for the season.

Image 2: Sugar mix per fortnight (%)

 Source: Unica, Hedgepoint

Alongside this revision, we downgraded our TCH expectations. Instead of an 8.9% TCH correction, recent fires might induce a sharper drop we currently estimate 9.5%. As a result, our cane estimates are now closer to 610Mt, compared to the previous 614Mt.

Taking all these changes into account, our sugar production estimate has been revised down from 40.3 Mt to 39.6 Mt, a drop of nearly 700 kt. This reduction will result in fewer exports and tighter trade flows, shedding a light to the recent shift in speculative positioning. Funds are now beginning to factor in the expected availability issues during the Brazilian intercrop. Coupled with a more bullish macroeconomic environment and the approaching October expiry, this sets up a supportive scenario for the March 2025 contract.

Image 3: Cummulative TCH (t/ha)

Source: Unica, CTC, Hedgepoint

While some factors, such as favorable weather for key Northern Hemisphere producers like Thailand, India, the US, and Europe, could limit gains, their recovery is not enough to offset Brazil's decline. We currently estimate a 1.3 Mt deficit from Q3 2024 to Q3 2025, primarily concentrated during the Brazilian CS intercrop, when prices should find more support and remain above Indian export parity, estimated at 21 c/lb.

Therefore, Brazil's sugar availability plays a critical role in shaping these projections. If the 2025/26 season shows signs of strong development, we could expect a healthy Q4 2025, leading to a bearish pressure on prices starting from Q2 2025 onwards and completely aligned with raw’s future structure.

Image 4: Total trade flows (‘000t tq)

Source: GreenPool, Hedgepoint

While we wait, we should keep an eye on October’s open interest to better understand what to expect of the expiry. It seems that market players are eager to get sugar off the table, squeezing positions and driving October prices above recent highs.

Image 5: Open Interest behaviour through September (‘000 lots)

Source: Refinitiv, Hedgepoint

Image62: Spec positioning (‘000 lots)

Source: CFTC, Hedgepoint

In Summary

About 400 thousand hectares of cane were affected by fires in Center-South Brazil, lowering quality and increasing costs. Our estimates for the region’s sugar mix estimate was reduced from 49.1% to 48.6%, and cane harvest expectations were downgraded from 614 Mt to 610 Mt, leading to a lower sugar production of 39.6 Mt, a 700 kt decline from our previous number. This reduction should tighten trade flows and is already affecting market positioning.

Northern Hemisphere producers may partially recover, but not enough to offset Brazil's decline, leading to a forecasted 1.3 Mt deficit in trade flows from Q3 2024 to Q3 2025. Brazil's sugar availability will be crucial for future projections, potentially causing bearish pressure if the 2025/26 season develops well. As October’s contract expiry nears, we should watch carefully how players position themselves.

Weekly Report — Sugar

Written by Lívea Coda
livea.coda@hedgepointglobal.com
Reviewed by Thaís Italiani
thais.italiani@hedgepointglobal.com
www.hedgepointglobal.com

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