Sugar and Ethanol Monthly Report - 2024 06 24

Currently, trade flows indicate a surplus for the 2024 calendar year, while 2025's outlook heavily depends on weather conditions. Assuming typical patterns, 2025 may also experience oversupply, particularly when Brazil introduces its 2025/26 output to the market. Given the recent La Niña weakening and the Center-South's limited correlation with this climat event’s precipitation patterns, there is insufficient evidence suggesting a significant reduction in cane volume from the region for 2025/26.

The market might witness a price rebound during Brazil's 2024/25 intercrop period, but mills could manage stocks and balance trade flows to mitigate any potential deficit. Thus, while there is room for price support, particularly to attract Indian sugar, the movement may not be as robust as some bullish traders anticipate.

Regarding Indian price parity, current estimates place it around 21.5 cents per pound considering domestic prices. However, this level could adjust once crushing and restocking begin, indicating that prices may not need to be as high to incentivize Indian mills' exports - but remember , government needs to comply! Nonetheless, if domestic prices hold firm, this could provide the necessary upside for Indian exports - indicating a mild effect rather than a strong bullish trend.

However, if weather conditions turn out worse than expected for the Northern Hemisphere's 2024/25 crop development and Brazil's 2025/26 season, the market dynamics could drastically change. But, this is still a speculative scenario, as some might contend that assuming average weather conditions is equally uncertain.

Therefore, prices are likely to remain within the 17.5-19.5 cents per pound range for some time, with potential technical upside, as traders await weather confirmations. A fundamental-based uptrend could potentially reach 21 cents per pound by the end of 2024 if forecasts suggest availability constraints, especially from Brazil.

Nevertheless, Brazil is on track for its second-best result in recent history. Even with a nearly 10% drop in TCH, the expansion of the planting area is expected to yield at least 613 Mt of cane. Assuming similar TRS to the 2023/24 season and a reduced sugar mix of 51.2%, Center-South Brazil could still produce 41.5 Mt of sugar and contribute approximately 33 Mt to the international market, particularly during the crop peak in Q3 2024. Effective stock management could prevent the predicted deficit in Q4 2024 and Q1 2025.

Looking ahead to the 2025/26 season, there is some optimism for recovery. Much discussion has centered on weather patterns and the potential impact of La Niña. The latest NOAA report indicates a high probability of La Niña during the Brazilian summer, which could affect cane development. However, the probability has slightly decreased, and the expected intensity of the event has been downgraded. Therefore, it is still too early to predict significant disruptions to cane volume.

Despite this, there is room for optimism about cane availability. We maintain our figures: 63 Mt to be crushed, 127 kg/t (potentially lower if wet weather persists), and a 49% sugar mix, leading to over 3.7 Mt of sugar being produced in the region.

Considering that sugar remains the most lucrative crop for the average farmer, a sharp drop in the area seems unlikely. Therefore, we remain skeptical and have a higher gross production expectation. With a marginal 2% drop in the area but a recovery in cane yield due to favorable weather, we expect total production to reach 37.2 Mt. With 5.5 Mt being diverted to the ethanol program, which should be the government's priority, sugar production would reach 31.7 Mt, a healthy result.

With this availability, India can replenish stocks to a three-month consumption level and still allow for 1.5 Mt of exports. However, the latter depends on price dynamics and government quota releases.

In terms of prices, one might expect that the current export parity estimated at 21.5 cents per pound, considering domestic prices, would correct marginally once the country starts crushing and restocking, meaning prices wouldn't need to be that high to attract Indian mills. However, if domestic prices remain resilient, that level could be the upside needed for Indian exports. Currently, our 2025 surplus accounts for the 1.5 million tons of sugar from India, and, therefore, a slight upside during Brazilian intercrop.

Considering these favorable weather conditions along with the final results of the 2023/24 season and sustained competitive prices for sugarcane, we have revised our cane availability estimate upwards from 98 Mt to 100 Mt for the 2024/25 season. This adjustment results in an estimated sugar production of 10.70 Mt, a 200 kt increase from our previous figure. It's important to note that this projection remains below the 11 Mt achieved in the 2022/2023 season, despite a capacity for 14 Mt. Additionally, this estimate still depends on weather developments during the main development period from June to September.

With higher production, we can also expect greater participation in trade flows. For the 2023/24 season, we have kept our figures unchanged at 5.5 Mt. However, for the next season, the country could reach 7.5 Mt. The inverted curve to H25 might result in seasonality patterns very similar to those of the 2022/23 season.

For the 2024/2025 season, Conagua expects wetter-than-average weather, which could benefit cane development, especially in June and July. Although excess rain can cause some damage, higher precipitation is welcomed after an extremely dry period. Therefore, we can expect cane volume and sugar production to recover in 2024/25, leading to higher sugar availability and diversified suppliers.

Alongside these marginal changes, the agency continued its trend of reducing imports from Mexico and increasing the "high-tier tariff/other" category for the 2023/24 crop season. However, with Mexico's expected recovery, we could expect a different trend in 2024/25. However, WASDE also decreased the anticipated volume of imports from Mexico for the upcoming season and increased the tariff rate quota (TRQ).