Dec 2 / Lívea Coda

Highlights amid market slowdown

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"The devalued Real incentivizes sugar exports and may lead to inflationary trends in the domestic market, with the crystal index expected to remain supported.

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Highlights amid market slowdown

  • During the last week of November, sugar prices slowed down due to minimal changes in fundamentals and the Thanksgiving holiday, which closed US markets.

  • Conab's third estimate for the Brazilian 24/25 crop suggests lower production due to decreased yield, especially in the Center-South region.

  • The latest Unica report signals the start of the offseason, with cane volume and sugar production falling behind the 23/24 results, indicating tighter availability.

  • The macroeconomic framework, particularly the strong dollar index and Brazil's weaker Real, sets a bearish tone to the commodity market.

  • The devalued Real incentivizes sugar exports and may lead to inflationary trends in the domestic market, with the crystal index expected to remain supported.

During the last week of November, sugar prices experienced a slowdown. This was not only due to minimal changes in fundamentals but also because of Thanksgiving, which led to the closure of US markets. However, there are three highlights worth monitoring:

1. Conab released its third estimate regarding Brazilian Center-South 24/25 crop.

2. Unica report signalizes the offseason start.

3. BRL faces a stronger devaluation trend.

Regarding the first point, the agency did not report any news. Production in the country is expected to be lower, with about 4.8% less cane and a 4.3% increase in the harvesting area. This suggests that the decrease in output is solely due to lower yield, which Conab estimates at 78 kg/ha, or 8.8% lower than in 23/24 for the entire country. This reduction is attributed to a combination of lower precipitation and higher temperatures in the Center-South region, which accounts for 91% of total cane production.


Image 1: Conab’s estimates for 24/25 cane crop

Source: Conab

An interesting factor is that Conab is more optimistic than most regarding the Center-South region. While we have kept our cane expectations unchanged at 610Mt, the agency predicts 616Mt, compared to the market's average, which until a few weeks ago, was around 600Mt. In terms of sugar output, we currently estimate 39.5Mt, whereas Conab forecasts a more bearish scenario (for prices) at 40.3Mt for the season. Although the agency is not considered the most reliable reference for sugar production estimates, especially for data on Center-South, the market does take its numbers into account before moving on. A more optimistic view from Conab regarding sugar availability could contribute to the difficulty in sugar prices breaching 22c/lb.

As for the latest Unica report, it seems to have had the opposite effect. With slightly less cane being crushed than the market expected and a surprisingly lower sugar mix and Total Recoverable Sugar (TRS), the first fortnight of November signaled the beginning of the offseason, setting a more bullish tone. While this is far from a sudden-death, as discussed during the mid-crop period, cane volume and sugar production have started to fall behind the 23/24 results, indicating that we are entering a period of tighter availability.

Image 2: Operating mills per fortnight (nº mills)

Source: Unica, Hedgepoint

Image 3: Sugar production per fortnight in Center-South

Source: Unica, Hedgepoint


Neither Conab or Unica brought, therefore, significant changes to what was already expected by the market, and sugar prices walked sideways. In a context of stable fundamentals, prices may react to other factors.

In the short run, the macroeconomic framework needs to be closely monitored as it could trigger price reactions. The dollar index remains strong, anchored in the expectation of an inflationary agenda by the recently elected Trump administration, creating a bearish environment for commodities in general. This outlook was reinforced by Brazil during last week, with the BRL weakening. This was due to a milder fiscal program being presented than what the market had anticipated, as well as the decision to exempt salaries of up to R$5,000 from income tax. Consequently, the BRL touched 6 reais. Although the government claims that this exemption will be fully neutralized by compensatory measures, the market's reaction indicates that the fiscal problem was not satisfactorily addressed. As a result, Bovespa, São Paulo's stock exchange, reached its lowest point in almost five months.

Image 4: Brazilian fiscal policy weakened Real

Source: Refinitiv, Hedgepoint


Brazil is one of the largest commodity exporters in the world, including sugar. With the Brazilian currency devalued, there is an incentive for exporters to sell, potentially flooding the market with product. However, as we enter the Brazilian offseason, there is little left from the current crop, and we might see some entering contracts for the 25/26 season. Another noteworthy trend concerns domestic prices. With an extremely devalued currency, the sugar domestic market becomes less attractive for producers, leading to an inflationary trend. Consequently, the crystal index is expected to remain supported. This inflationary trend can be observed in other markets, with even more strength in those where Brazil is a net importer.

In Summary

During the last week of November, sugar prices slowed down due to minimal changes in fundamentals and the Thanksgiving holiday, which closed US markets. Key highlights include Conab's third estimate for the Brazilian Center-South 24/25 crop, the Unica report signaling the offseason start, and a stronger devaluation trend for the BRL. Conab's estimate suggests lower production due to decreased yield, while the Unica report indicates tighter availability – however, none brought any changes to current fundamentals.

The macroeconomic framework, particularly the strong dollar index and Brazil's weaker BRL, also impacts the market. This devaluation incentivizes exports but may lead to inflationary trends in the domestic market.

Weekly Report — Sugar

Written by Lívea Coda
livea.coda@hedgepointglobal.com
Reviewed by Victor Arduin
victor.arduin@hedgepointglobal.com
www.hedgepointglobal.com

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