S&D and Trade Flow Update - 2024 08 20

We are at a pivotal point where the market appears to have reached its bottom . In previous reports, we've highlighted 17.5 c/lb as a significant support level, not reaching Indian export parity and with Chinese arbitrage beginning to open in producing states. As a result, we anticipate that prices may recover in the coming weeks and stabilize, depending on the pace of the Brazilian Center-South crop pace.

While there's been widespread talk of a potential sudden death , it's important to note that the region's TCH remains robust. However, when comparing with previous seasons, we could see a sharper correction in yields between August and September. Depending on the extent of this reduction, we might need to revise our cane estimates downward from 620Mt. For now, we have chosen to keep our estimates unchanged until further confirmation. That said, even if we were to lower the region's sugar production to between 41.3Mt and 40.5Mt, a surplus would still exist, though it would be less pronounced.

This trend could lead to additional tightness, reinforcing the expected support for sugar prices during the Center-South’s intercrop period. Prices would need to return to Indian export parity, at least 18.5 c/lb. Given all the underlying factors, it’s reasonable to expect prices to move back to 19 c/lb when TCH start showing signs of weakness, with the potential to breach 20 c/lb during the intercrop. However, it remains challenging to discuss levels approaching the highs seen in 2023.

hectare) compared to last season. This projection assumes a sharper decline in the index going forward, similar to what was observed in the 2016/17 season, the last year impacted by El Niño. Depending on the actual area growth for the next crop, which could range between 2.5% and 4.5%, the total cane production is expected to fall between 608 million tons and 620 million tons. According to Conab’s report, the area growth in Center-South for 2024/25 is projected at 4.5%, suggesting that production could lean towards the higher end of the range, closer to 620 million tons, especially considering some leftover cane.

Regarding cane quality, a noteworthy trend is the higher concentration of reducing sugars (RS), such as glucose and fructose, in the total recoverable sugar (TRS). This has been reported by many mills and is one reason behind the lower sugar mix. Several reductions in sugar mix expectations have been noted, and with a projected mix of 50.2% for the season, sugar production could range between 40.5 million tons and 41.3 million tons. While we remain optimistic about reaching the upper end of this range, it is crucial to closely monitor TCH levels.

If production trends towards the 40.5 million ton mark, we could see a longer inter-crop period, which may provide some price support. However, it's important to note that trade flows would still suggest a surplus, shifting market discussions from a 1 million ton surplus between Q3 2024 and Q3 2025 to something closer to 300 thousand tons. Consequently, the price range could adjust from 17-19 cents per pound to 18-21 cents per pound, depending on the duration of the inter-crop period.

On the export front, the NNE region maintained strong momentum during the intercrop period, achieving nearly 25% growth between April and July. According to SECEX, 603 kt of sugar were exported, with 458 kt being raw sugar and 144 kt white sugar. The U.S. remains a key trading partner, receiving about 14% of these exports, or roughly 87 kt, compared to 16%, or 67 kt, during the same period last year.

In their press release, ISMA projected gross sugar production (before diversion) for the 2024/25 season at around 33.3 million tons . After accounting for a 5.5-million-ton diversion, the net sugar production would be 27.8 million tons. The agency also noted that, with an expected higher opening stock of around 9 million tons and domestic consumption projected at 29 million tons, the country would still end the season with higher-than-normal stocks, exceeding the typical 2.5 months' reserve of 5.5 million tons.

Although we have observed these figures, we remain confident that the country has the potential to increase production. Sugarcane continues to be the most profitable crop in the nation, and the favorable monsoon season has supported cane’s development. The primary concern is the potential for an increased spread of disease, namely red-hot, and adverse weather conditions in the future. Nonetheless, we have maintained our production estimate at 31.7 million tons, which is nearly 4 million tons higher than ISMA’s projection and allows us to call 1.5 million tons of exports.

We are entering the key window for next season's cane development. In July, above-average rainfall was recorded in Thailand's main cane-growing regions—northeast, north, and central part of the country. Looking ahead, the Thai Meteorological Department’s 3-month outlook for August to October forecasts below-normal rainfall in parts of the east and northeast in August, normal rainfall in September, and above-average rainfall in October.

This weather pattern should support cane development, making it feasible to achieve our 10.7-million-ton sugar production estimate, based on 100 million tons of cane. Consequently, Thailand could return to exporting over 7.5 million tons of sugar, contributing to a more comfortable trade flows.

Looking ahead to the next season, weather conditions will be crucial for assessing the potential for recovery. According to Conagua, national accumulated rainfall in July 2024 was 153.3 mm, which is 21.8% above the national average (1991-2020) of 125.9 mm, resulting in a surplus of 27.4 mm. During the month, most of the country saw above-average rainfall, particularly in the Central Plateau, western, northeastern, and southern regions, with significant increases in San Luis Potosí and Veracruz – key sugar producing states. This is promising for cane development, which coupled to the fact that 2024 has experienced a 5.9% higher cumulative rainfall compared to the average, allow us to expect some recovery.

Beet sugar supply is expected to reach 4.8 million metric tons, an all-time high, while cane sugar is forecasted at 3.7 million metric tons. Consequently, the stocks-to-use ratio for 2024/25 is projected to be as high as 15.9% at the end of the season.

As a result, the U.S. may require fewer imports than previously anticipated. The agency estimates imports for 2024/25 at 2.6 million metric tons, a 20.5% reduction from the 3.3 million metric tons projected for 2023/24. This shift might indicate a more bearish outlook.