The sugar market has lost some of its lustre over the past couple of weeks as several events have shaken the confidence of investors across financial markets. Sugar has also been hit by some negative fundamental news of late as the spot price of sugar dropped to its lowest level in 12 months this week.
In macroeconomic terms markets are worried that growing inflation will lead to widespread recession as central banks look to quell the overheating by increasing interest rates. Morgan Stanley said this week that 77% of global central banks have increased rates in the past six months, “making this the most-synchronised cycle of rate hikes since the early 1980s”.
Brazil
Oil prices have softened marginally which has dragged down the value of ethanol in Brazil at a time when the President of Brazil is cutting the government-controlled price of petrol to win voter support before the upcoming presidential election.
This of course is expected to result in sugar mills (who commenced crushing in April) to divert more sugar cane to sugar production instead of ethanol. The value of ethanol has fallen to around 17-17.50 cents per pound in a like for like comparison with sugar. Sugar followed suit dropping from 19.50 c/lb a few weeks ago to 17.72 at time of writing.
We expect oil prices to remain strong around the USD 80-110 range for the foreseeable future as global inventories remain relatively low. This will put a floor in the sugar market around ethanol parity.
Brazil released their latest round of crushing results to mid-July this week. Total crushed cane season-to-date still lags 2021 by 25m tonnes of cane however this is mostly due to mills commencing crush much later this year compared to 2021. Still, overall results are not shooting the lights out, estimates for total cane to be crushed have slipped from initially 560+ million tonnes to below 550m currently with further slips possible if yields sour over coming months. Any decline in Brazilian yields will give a strong boost to the sugar market so this is key to monitor.
India
The Indian Sugar Millers Association reviewed satellite imagery of area under sugar cane across the country recently and concluded that the planted area has grown by 4% compared to last season which produced a record amount of sugar, 35+ million tonnes. This means sugar production in India looks set to grow further and exports will remain strong. Exports from October 2021 to September 2022 will surpass 10m tonnes, another record.
There were concerns that atmospheric conditions over the Indian ocean would delay and reduce rainfall across India through the monsoon season however rainfall to date for most cane growing areas has been close to average. There is plenty of time for this to change, the next Indian harvest will commence November.
Thailand/Europe
Thailand is now in their inter-crop period and rainfall thus far has progressed very well.
The Thai industry expects cane production to continue to improve in the next season commencing November with 100-120 million tonnes of cane the initial forecast.
Europe has experienced sweltering dry weather this summer which has dented yield forecasts for the Autumn sugar beet harvest. Sugar beet is a hardy plant and yields could yet improve dependant on rainfall over the coming month. However, there seems to be plenty of downside with the EU likely to produce less sugar than they consume this year (deficit).
MSF Price Forecast
Sugar will continue to be impacted by macroeconomic factors namely recession fears and covid lock downs in China which impact oil prices and broader markets. Despite this MSF does see a floor in the sugar market around Brazilian ethanol parity currently 17-17.50 c/lb.
A sugar price rally in the short-term is possible however will be dependent on weather and/or crushing results across key growing areas, Brazil, India and the EU. If Brazilian crush results were to undershoot expectations over coming weeks and months, the sugar market would see strong improvement. Longer term the market’s fears around sugar supply seem to be subsiding with bigger crops for most important producers expected moving forward.