Sugar: Does the dispute for physical space with grains increase risk?

Every forecast carries some degree of risk with it, given the multiple factors that influence markets. But, according to all indications, sugar availability should remain under pressure throughout 2023. Three main factors signal a tightening of availability, and thus, price support above 25 USc/lb:

• The drop in production in the Northern Hemisphere, especially in Asia (India and Thailand);

• The intensification of a probable El Niño effect and its negative impacts on the future availability of the sweetener.

• The probable pressure on Brazil’s export capacity, given a stupendous soybean crop (and that of corn) – in this case, we know that grains have preference over sugar at the time of shipment.

In other words: Since there’s no sign of investment in the expansion of infrastructure and Brazilian port capacity, the export of sugar (when competing with the vast availability of grains) could be displaced in relation to the calendar. Usually, the export of sugar peaks between June and August. However, this year, it may occur in the fourth quarter from October to December.

The precarious conditions in India and Thailand

As expected, the Asian monsoon season extended into September and October of 2022, leading to a drop in productivity in India and Thailand, the main producers in the Northern Hemisphere. Thus, the need to increase the pace of crushing occurred.

In addition to climate and physical impacts, there are other factors that can influence the performance of sugar on the global stage. In Thailand, there’s constant competition with the cassava market, which may even result in a reduction in the country’s planted area. In India, ethanol program variables are elements that tend to reduce sugar availability.

Now in 2023, specifically with the intensification of the El Niño phenomenon, the market has started to price a second year of reduced production by the main NH producers, since the monsoons may be below average and harm the development of sugarcane. As a result, it’s expected that the volume of sugar trade flows from October on will be reduced.

The Northern Hemisphere and the Brazil “Factor”

The deterioration of prospects for the current crop in the Northern Hemisphere affects the expectations of total production and recovery of the future crop. This makes trade flows more dependent on Brazilian production. How and why does this happen?

Firstly, the country’s soybean and corn production should improve significantly – soybeans should go from 78.9Mt in 2022 to an impressive 92.4Mt in 2023, and corn from 43.4M to 49.2Mt. As a result, export capacity should push its limits during the June-August window. It’s also common knowledge that the chain tends to break at the weakest link. That is, as the grain market has a higher margin/profitability, sugar is generally reallocated.

In other words, considering the historical maximum export capacity (grain combined with sugar), mills will have to wait a little longer for their products to reach international markets. Furthermore, reducing the volume from June to August, and then increasing it to full speed from September on, will allow the current physical tightening to gain strength and last longer than expected, persisting until at least the third quarter of 2023.

Another interesting aspect to point out is this adjustment in the seasonality of Brazilian exports will end up anticipating the Northern Hemisphere’s lower production in 23/24. Even with an expressive crop, Brazil will not be able to compensate these trade flows. The displacement should end up balancing the sugar market, avoiding a momentary surplus that could occur if Brazil placed a large part of its volume in Q2.

Thus, the displacement means that Brazilian sugar arrives in the market when the effects of a possible second year of low production in the Northern Hemisphere begins to be felt. In this way, the price of sugar tends to be sustained, and the commercial flow remains tight. The danger in this scenario would be an NH recovery. If it occurs, the greater availability in T4 would be seen as bearish.

In any case, there would continue to be a price reduction bias, which could even gain traction, but only if NH production in 23/24, contrary to all current prospects, adds extra volume to the excess supply expected.

The Scenario for Brazilian Sugar

As mentioned at the start, every analysis contains a degree of risk. In the case of Brazilian sugar, we’re working with the perspective that the country can produce around 595Mt of sugarcane, reaching around 37.6Mt of the sweetener.

Although a max sugar year is becoming clearer by the day, especially considering the current tightening of the physical market along with rising prices, there are factors that will influence this scenario. Among them are government decisions on fuels, their taxes, and pricing methodology. Furthermore, a strong El Niño effect can penalize the sugarcane quality and the pace of the harvest.

On the other hand, signs are that the 18Mt level of exports in one month (grains and sugar combined) will be exceeded, which would be problematic. It’s necessary, however, to consider that export capacity is extremely difficult to estimate, and there can always be surprises. In any case, if the usual seasonality is maintained or not, this factor doesn’t alter the physical tightening scenario. Instead, it merely redistributes it.

The Possible Synthesis

As previously mentioned, it’s expected that there’s little or no prospect of recovery by the NH’s main players (India, Thailand, and the EU), where flows may become even tighter, depending on El Niño impacts.

To sum up, physical tightening should persist, supporting sweetener prices. If there’s a change in the pace of exports from the country, trade flows become more balanced, and support is maintained – even more so within the context of the NH’s deteriorating crops. If there’s no redistribution of Brazilian exports, greater availability may still find its way to global flows in T2, inducing possible corrections.

The biggest risk to the price levels observed today is climatic. Any improvement in the NH’s outlook could induce price corrections.

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