On the back of the strong dollar, speculator money continued to flow away from sugar in the month. The net long position reduced by 36 828 lots to 149 628 lots, with funds now representing only 14% of open interest (compared with 348 218 lots in September 2016). The reduction was driven by long liquidation.
The Brazilian cane crush has all but ceased, with production at the few mills still open hampered by rain. Cumulative sugar production is 35.06 million tons year to date, 17% ahead of the same time last year. The latest estimates for sugar production for the current season is 35.61 million tons, slightly down from the previous estimate reported of 35.68 million tons. Export estimates for the Brazilian 2016/2017 season are 24.92 million tons (according to Platts), of which 22.35 million tons are expected to be raw sugar.
By mid-December, the Brazilian sugar: ethanol mix was up a further 5.5% year on year (now 46.68% sugar). Ethanol parity remains at approximately 17.00 US c/lb, which should continue to provide a floor for sugar pricing. The PIS/Confins tax, paid by companies in support of the government’s social integration programme (unemployment) and social security (retirement and healthcare) that had been waived from 2013, was reinstated on 1 January 2017. Millers are expected to incorporate this tax into ethanol pricing. It is unclear whether this will have an impact on the sugar:ethanol mix going forward.
Chinese production started well in November 2016, estimates for the season remain 9.6 million tons, with consumption pegged at 15.3 million tons. Government stock releases are expected to be in the region of 1.5 million tons. High levels of world imports (+900 000 tons) were reported in the last quarter of 2016. Smuggled imports from Myanmar are expected to slow in the 2016/2017 season to 1.5 million tons, from 2.1 million tons in 2015/2016, as a result of tightening border controls on one hand, but also possibly due to lower export volumes available from India.
Indian production estimates for 2016/2017 Oct/Sep now range between 21 and 22.4 million tons, as producers continue to be challenged by poor planting and ratooning conditions following two weak monsoon seasons. Uttar Pradesh is the only area showing an increase in estimate for the current season versus the prior year (of 1.1 million tons), while Maharastra and Kamataka are expected to show drops in production of 2.8 and 1.1 million tons respectively. It is still expected that imports will be required to close the gap by October 2017. The early closure of central mills in Q1 of 2017 could trigger the local price rises necessary to prompt the Indian government to reduce the import duty. Timing of this action will likely influence pricing sentiment.
EU sugar prices traded sideways in the month, Western European prices at €602 per ton, Mediterranean pricing at €628 per ton. Economic Partnership Agreement/Everything But Arms (EPA-EBA) countries have sent significantly less duty-free sugar to Europe when compared with the same time last year (approximately 450 000 tons this year, versus 590 000 tons last year), mainly due to reduced production as a result of drought in producing countries.
On a national crop year basis, Kingsman have updated their global production and consumption figures to yield a deficit of 4.7 million tons in the 2016/2017 season. In line with views shared at the December 2016 International Sugar Organisation (ISO) conference in London, the 2017/2018 season is expected to yield a global surplus of just under 3 million tons. These estimates may give some support to pricing in the near term, but will tend to weigh on pricing sentiment in further out contracts. In general, a strong dollar and interest rate hikes are not supportive of commodities, and further fund liquidation may be expected. Reduced Indian production estimates, and the potential for a reduction in import duties creating opportunities for world market imports could give some relief to bearish sentiment in the coming months.