Sugar: Tighter Times Ahead

It’s Sugar Week in Brazil, and players are eager to know when the expected supply deficit for 2019/20 will start to be reflected in prices. We might have to wait a bit longer; the market needs to drawdown large stocks, and the threat of significant Indian exports is keeping people nervous.

The shift back to deficit

The global sugar market is set to return to a deficit of around 5mt in the 2019/20 season having spent the last two seasons in surplus. The change has been driven by lower YoY output from the likes of India, Thailand, the EU and Central-South Brazil. Declines in India, Thailand and the EU has been driven by a combination of poor weather and lower planted area. While in CS Brazil the reduction is driven by the fact that mills in the region continue to favour ethanol production over sugar.

Given the deficit outlook for this season, one would expect that to be broadly constructive for prices. However, looking at price levels and the fact that speculators continue to hold a sizeable net short position in No.11 sugar all show that this is clearly not the case. So why the disconnectbetween tightening fundamentals and prices?

There are two key factors which are keeping the lid on sugar prices

There are two key factors which are keeping the lid on sugar prices. Firstly, we have come out of a two-year surplus period, where we saw a significant buildup in stocks, and so we would need to see a drawdown in these stock levels before one can get overly bullish about the market.

Secondly, India is key for market sentiment. While India is set to see a smaller crop this year, they are still expected to have a surplus, and so adding to the already high stock levels in the country. These stocks will remain a risk to the world market, and so prices are unlikely to move significantly above export parity levels, unless the world market needs this sugar. For the moment, it seems, it doesn't. 

Saying that, we do hold a mildly constructive view on the market, and are forecasting that No.11 will average USc13.30/lb over the course of 2020, as we move deeper into deficit. Obviously, key to this assumption is that we do not see any upside surprises to production, or India increasing subsidies to shift domestic sugar to world markets more quickly.

Global sugar stock change (m mtrv) vs. No.11 sugar price

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The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument.  more

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