Sugar No 11 prices fell 2% over September, with the October 2017 futures expiring at 13.54 USc/lb, 21 points lower in the month. The March 2018 contract (now the front month) fell 26 points in the month to close at 14.10 USc/lb. The white premium suffered the biggest losses in the month. The new front month December 2017 contract lost $27.80 (7%) to finish the month at $362.20 per ton. The March (No 5)/March (No 11) premium contracted to $56.20 per ton.
Speculators appeared to have factored in the low level of producer hedging undertaken thus far, maintaining a net short position 89 k lots, 29 k lots lower than the end of August.
ASR Global Sugar Group’s analyst observed that approximately 90% of the growth in global production, year-on-year, is taking place in the Northern Hemisphere, with significant production increases expected in the EU 28 (4.203 tons), India (4.189 tons), Thailand (2.935) and China (1.33 tons). Albeit with growth smaller in magnitude, Russia and Pakistan also continue to make the news, adding to the bullish fundamental sentiment.
EU and UK
Discussions around the future of EU and UK sugar regimes post-Brexit continue to dominate news. EU tonnage was priced against the No 5 London exchange for the first time since 2010. Export forecasts are in the region of 3.05 million tons from the harvest recently started, compared with 1.43 million tons from the prior year. There has been some skeptism as to the EU’s ability to physically export the expected increase in quantity of sugar in the new season, however the completion of a sugar terminal at the port of Antwerp together with reports from EU and UK growers confirming the earnest gearing up for exports, indicate that this is a serious possibility.
The expected increase in EU beet production has not only had a dampening effect on the world price for sugar, but also on EU ethanol. Of the expected 20.5 million tons of sugar production, 1.2 million tons is likely to go into ethanol production, according to Kingsman’s EU Sugar Editorial. This would represent an 18% increase in ethanol production year-on-year, of a total fuel ethanol production of 5.4 million tons (the balance produced primarily from grains). The level at which EU producers would favour ethanol producer over sugar is yet to be fully established, however it does not look as if ethanol will pay more than sugar in the foreseeable future.
The Indian crush operations begin now, with Uttar Pradesh and Maharashtra getting under way in late October and early November respectively. Heavy rainfall in late September is reported to have delayed the start of the crush throughout the country. The Government of India is intent on preserving domestic prices, in spite of rumours of current low stocks, and is challenging producers who “hoard” stocks by imposing stock limits. In Maharashtra, the government is directing millers to make full payment to farmers on time or pay interest on outstanding amounts for the 2017/2018 season, in an effort to encourage liquidation of stocks, and reducing import requirements. In spite of this, the government has released a quota of 300k tons imports with a 25% duty for arrival before 15 November 2017, to deal with the period before mills start up fully, which may be further delayed by above-normal rains.
With Thai production increasing dramatically, and consumption remaining flat at 3.1 million tons, raws exports are expected to increase by 1.2 million tons. Refined exports are expected to increase by 600 k tons.
The filling of Chinese out of quota demand (around 1 million tons) is taking place rapidly, and includes two shipments from South Africa. Countries including our own that benefit from a temporary 50% import duty fill a supply gap, before production of a bumper 10.5 million tons begins.
The Pakistani government has ratified an export subsidy of approximately $100/ton for 1.5 million tons, on a sliding scale that reduces the size of the subsidy as the No 5 price increases between $376 to $499 per ton. The first 500 000 ton tranche eligible for the subsidy has been released. Only millers who have no cane arrears to farmers are eligible for the subsidy. Exports must be completed within 60 days to prevent stock build up. The move is due to a build up of stock from the previous season, where nearly 1.9 million tons more was produced than initially expected. It is expected that this additional export volume will be compete for customers with Dubai and Indian refineries.
Russian beet production continues to exceed consumption, and is becoming a consistent feature of analyst discussion. By the end of September 2017, farmers had harvested approximately half of the 1.2 million hectares of sugar beet, 26% ahead of the same time last year. The final crop is expected to be between 6.2 and 6.5 million tons, which may result in exports of 700 000 tons white sugar.
In Brazil, hydrous ethanol paid more than sugar in early August when the No 11 price reached the low 14.00 USc/lb level. Since that point, there has been some shift in the sugar:ethanol mix, with the hydrous ethanol output up nearly 13% year on year by mid September. UNICA’s latest forecast of the proportion of the full crop directed to sugar reduced in the last few weeks from nearly 48% to just over 46.5%. Trade house Wilmar pegs total sugar production for the 2017/2018 Brazilian season at 36.8 k tons, with production 1.5 million tons ahead of last year by mid-September, with over 70% of the crop harvested.
A significant conversion to ethanol for the balance of the season would be required to significantly impact the global supply and demand balance (currently estimated by a number of analysts at almost 4.2 million tons). However, Citi Bank takes the view that with the recent rally in hydrous prices, a significant swing to ethanol could indeed take place. A 1% change in sugar mix constitutes a 750k ton reduction in sugar production from Brazil. This could galvanise a pricing rally, but not many analysts support this view.
Forward-looking views on pricing remain mixed, and fairly flat. The No 11 has been range-bound for some time now. With producers still under-hedged, a pricing rally will likely be capped by producer selling. A late start to the Indian crush, and some shortages in that market may offer a temporary boost to raw sugar pricing. However, the significant overhang of global stock and looming bumper production are likely to temper this. Spikes is pricing may be offer fleeting opportunities to capture some value. It would seem that the white premium will remain under pressure while the EU production dynamics play out in this first season post quota abolition.
Judith is the Commercial Director at SASA