Sugar futures market rebounds alongside real, oil

Santos — The front-month ICE NY11 July sugar futures contract posted its highest close since March 11 on June 3, reaching 11.62 cents/lb after a rally that began May 29, on the back of strength in the Brazilian real against the US dollar and international oil prices.

The commodity complex as a whole has risen on the prospects of a global economic recovery, while the recent strength of the Real has seen sugar futures find support to offset that upside for the currency.

But the macroeconomic environment is still full of uncertainties, with the coronavirus pandemic still hampering consumption rates for fuel and food, which is considered bearish for Brazilian sugar and ethanol markets in the long term. However, overall Real weakness against the US dollar has been encouraging producers to deliver record sugar production.

Since the start of the 2020-21 crop year in the key Center-South region of Brazil, sugar exports in Real terms have been paying an average of Real 1,251/mt, or 18% higher than the average price since April 2017.

In a global sugar supply and demand picture in which Brazil will be adding 8 million mt to the balance, any increase in the price for local producers could potentially translate into further output from the world's biggest producer this crop year. In addition to the price rise, lower fuel demand is diminishing the appetite for producing ethanol in Brazil, encouraging even greater sugar output from the country's mills. The latest consumption data show Brazilian hydrous ethanol demand in April was 33% lower year on year.

FUTURES PRICES SEEN NEARING CEILING

While cash premiums for FOB Santos cargoes in the spot market have been quite steady and ranging into positive territory, sources are starting to raise the possibility of a reversal in that trend as soon as the July futures contract expires, as a new record volume is expected to be delivered.

S&P Global Platts assessed June shipment cargoes at a 23 point premium to the July NY11 futures contract on June 3, some 17 points higher on year and equivalent to $3.75/mt, however most of that spike in the cash premium can be traced back to logistical concerns at the largest port for Brazilian sugar exports, Santos.

The Santos port sugar line-up on June 3 showed named ships were expected to export 2.93 million mt through July 16, of which 46% or 1.34 million mt was declared for Rumo 16/17 terminal, according to Unimar Shipping Agency. The waiting time at Santos port is expected to fall from Q3 as the Cofco terminal will shift from soybeans cargoes to sugar, adding a monthly export capacity of 400,000 mt and decreasing the logistical pressure.

Meantime, the white sugar premium (WP) – the premium paid for refined sugar over raw sugar – fell from $138/mt on May 27 to settle at $113/mt on June 3, a drop of 18% in a week. For Brazilian producers that drop was even more relevant as the dollar depreciated 3.79% against the Brazilian currency in the same period.

The WP is an important gauge of refiners' appetite for importing sugar and any decrease can cut raw sugar demand and cap the futures price.

Brazil has already given strong signals that a shift in the volume of cane converted into sugar or ethanol could be coming for the next crop, however, for the current 2020-21 crop, that ability was reduced by the high volume of sugar hedged in the futures market and committed with trading houses and weak fuel demand, which caps the hydrous ethanol price.