Nov 18 / Lívea Coda

Macro vs Fundamentals

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"After an extremely sluggish week for the sugar market, the expiry of white sugar contracts came to the rescue, reminding the market of the current bullish fundamentals."

Macro vs Fundamentals

  • Raw sugar prices saw a sharp correction last week, influenced by macroeconomic trends like a stronger dollar and a weaker Brazilian real.
  • The over 2% price drop seen last Monday was partly due to rains in Brazil's Center-South region and Unica’s report anticipation.

  • Concerns about increased cane availability in the Center-South region led to a loss of market momentum, but estimates for sugar production remain unchanged at 39.7 million tons for 24/25.

  • Increased white sugar availability from Europe, Thailand, Central America, and India has affected the white premium and demand for raw sugar, keeping prices under pressure.

  • By the end of the week, however, whites’ delivery added a bullish tone, with raw sugar showing a strong recovery in the first trading session of this week.

Last week started with a sharp correction to raw sugar prices. One might argue that sugar prices have been shaped by broader macroeconomic trends, such as a stronger dollar following Trump’s election and a weaker Brazilian real amid anticipated fiscal policy changes in Brazil. However, these factors alone don't fully explain last Monday’s price drop. While the long-awaited rains across Brazil's Center-South region played a role, the over 2% decline suggests that traders were already pricing in UNICA’s results, which revealed a higher-than-expected crushing volume.

Concerns have emerged that the Center-South region might have more cane availability than previously estimated, leading to a loss of momentum in the market. Nevertheless, we chose to keep our estimates unchanged, as many mills are wrapping up operations, and our forecast for crushing was already more optimistic than the average. With an estimated 610 million tons of cane and a slight reduction in the sugar mix from 48.2% to 48.1%, sugar production could still reach 39.7 million tons in 24/25. Although this is a strong result despite weather challenges, sugar remains supported by bullish fundamentals due to limited short-term availability from major producers, but this support is not as strong as one could expect.

The main reason behind sugar’s difficulty in breaching the 22 c/lb level could be explained by the demand side.

Image 1: Stronger Dollar and Weak Brazilian Real: A Recipe for Bearish Sugar Prices

Source: Source: Refinitiv, Hedgepoint

As the market began factoring in a partial recovery in the Northern Hemisphere, white sugar started to lose its support. Europe has reported favorable weather and strong beet yields, while Thailand, Central America, and even India are expected to have higher availability in 2024/25 compared to 2023/24. Since these regions primarily produce white sugar, their increased output is likely to balance trade flows in white, differently than in raws, which are largely dependent on Brazilian supply.

Image 2: Weekly White Premium Seasonality (10 years - Usd/t)

Source: Refinitiv, Hedgepoint

This imbalance between sugar qualities has weighed on the white premium, a key indicator for standalone refineries in deciding whether to import and refine raw sugar. The shift, which began in August, may now be visibly affecting demand, with cash premiums for raws at Santos declining, contrary to their usual trend during the Center-South off-season. Additionally, there are rumors that refineries stocked up when the white premium was high, and Brazil was ramping up sugar exports, further pointing to a weakening in demand.

The combination of weakening demand, a stronger dollar, and a depreciated Brazilian real has kept raw sugar prices under pressure, triggering speculative positioning to a neutral/short stance. However, traders should keep in mind that, eventually, the market will turn to Brazil for supply – and at that point, availability may be more limited

Image 3: Raw Sugar Monthly Santos FOB Premium (USc/lb)

Source: Refinitiv, Hedgepoint

By the end of the week, white sugar’s delivery already added a bullish tone to the market. With a reduced volume of around 191kt – the lowest for the December contract in recent history – it appears that the anticipated bearish pressure from the Northern Hemisphere has already been priced in. The white sugar curve returned to an inverse, potentially providing support to raw sugar, which has already shown a strong recovery in this week’s first trading session, gaining over 3%. Knowing that fundamentals haven’t actually changed, availability constraits should add to price support.

Image 4: White Sugar Delivery | December Contracts (‘000 t)

Source: GreenPool, Hedgepoint

In Summary

Last week, raw sugar prices experienced a sharp correction, influenced by broader macroeconomic trends like a stronger dollar, a weaker Brazilian real, long-awaited rains in Brazil's Center-South region and higher-than-expected crushing volumes reported by UNICA. The market's difficulty in breaching the 22 c/lb level was attributed to demand-side factors, including a partial recovery in the Northern Hemisphere and increased white sugar availability from Europe, Thailand, Central America, and India. This has affected the white premium and demand for raw sugar, keeping prices under pressure. However, by the end of the week, white sugar's delivery added a bullish tone, with raw sugar showing a strong recovery in the first trading session of the current week.

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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