Geran Ranganthan


The New York sugar futures contract has been on an upward trajectory since the start of October 2018. The March 2019 contract has rallied from 11.61 US c/lb on 1 October 2018 to closing high of 14.01 US c/lb on 24 October 2018. This represents a 240 point (21%) rally since the start of October. The key reasons behind the rally are as follows:

  • •sPersistent reduction in the production estimate for Brazil. The likelihood for a sudden death to the Brazil crop has increased in the recent weeks. Analysts indicate that sugar production estimates have been revised downwards by 1 million tons. This has certainly aided the bullishness in the market.
  • There has been a rise in hydrous prices in Brazil. Current hydrous parity is reported at 15.09 US c/lb No 11 equivalent. This has essentially resulted in a greater diversion of cane to ethanol production.
  • The Brazilian Real has also strengthened against the US Dollar, with some market analysts suggesting that at these exchange rates the incentive for sugar exports is significantly reduced. The Brazilian Real has strengthened from 4.01 BRL/USD at the start of October to 3.64 BRL/USD currently.
  • Major growing countries across Europe are also experiencing dry weather, which has resulted in reduction of beet yields for the 2018/2019 season (October-September). This could lead to a production estimation reduction of 1.5 million tons.
  • While India remains the globally largest producer and biggest swing factor this season, production estimates have also been reduced by some analysts by as much as 2.5 million tons.
  • While the above fundamental factors have had an impact on the prices, especially during the start of the rally, the majority of the rally has been down to the speculators covering their short position. The speculators have reduced their net short position from 142 000 lots in the start of October to a net long position of 12 500 lots as per last week’s Commitment of Traders report.

Based on the information presented above, the recent rally the market experienced has had very little support from a fundamental perspective. The news of reduced Brazilian and European crops has been a persistent feature since the start of 2018/2019 season. If fundamentals are not impacting prices significantly then what is?

The answer to that questions is the speculators. Figure 2 below shows the strong correlation between speculator activity and pricing changes in the New York No 11 market. With little change in fundamental news from June 2018, speculator activity has driven prices.

Despite reports of reduced production out of India, the Indians are still expected to be the world’s largest sugar producers for the 2018/2019 season. Recent reports regarding the condition of the crop in the southern parts of Maharashtra has resulted in estimates for this key growing region reduced from 11.5 mmt to 9 mmt. The reason behind the reduction can be attributed to white grub infestation which has led to cane wilting. The infestation resulted from a below normal southwest monsoon in this region. The reduction in Maharashtra has reduced the total production estimate for the 2018/2019 season from 35.5 mmt of sugar to 33 mmt sugar.

On 26 September 2018, the Indian government announced the country’s much anticipated export program for the 2018/2019 season. According to the Times of India, the Government approved a Rupee 45 Billion package for sugar industry which included the following:

  • Over two-fold jump in production assistance to cane growers. The new export scheme allows for a cane subsidy of Rupees 138.80 per ton which is two and half times more than the Rupees 55 per ton approved in the 2017/2018 season.
  • Transport subsidy to mills for exports up to 5 million tons in the marketing year 2018/2019. Mills will be paid Rupee 1 000 per ton for mills located within 100 km from the port, Rupee 2 500 per ton for mills located beyond 100 km from the port in coastal states and Rupee 3 000 per ton for mills located outside of coastal states.

With a massive 2018/2019 crop on the cards and ample government support, the market awaits for an indication on significant exports from India. Despite the recent rally in prices, the Indians’ have been rather inactive in the export market. With prices sitting close to 14.00 US c/lb and export parity from Indian perspective in the region of 12.50 US c/lb (as per recent Kingsman reports) why would India not export? The reason behind the lack of activity, rest on another government decision. The Indian Sugar Mills Association (ISMA) wrote to government asking them to increase the minimum support price of sugar. Any increase in the minimum support price will automatically increase the export parity price. The world market will watch the situation unfold with bated breath in the coming weeks as any decision will definitely have an impact on prices.

Along with India, Thailand are expected to have another massive crop during the 2018/2019 season. Latest Kingsman estimates suggest Thai production of around 14.2 mmt for the season with some upside risk to this estimate on the back of favourable weather conditions. While this does represent a 2% reduction from the numbers posted last season, one can definitely expect to see Thailand active in the export market.

Brazilian production for the 2018/2019 season (April-March) has been hampered by adverse weather conditions. The start of the season saw extremely dry weather in major growing regions, which has culminated in lower agricultural yields in the current season. UNICA released production figures for the first half of October last week. The numbers posted showed a sharp decline compared to the number achieved last season. Cane crushed for this period was down 21.3% when compared to last year crush figures. According to UNICA, the cumulative amount of cane crushed so far this season has decreased drastically when compared to last season’s figures.

The Europeans have also experienced adverse weather conditions which has affected their sugar beet campaign. An extremely hot and dry summer has been followed by limited rainfall in key beet-producing regions. Cumulative precipitation in France, Netherlands and Belgium for the month of October has reached only 14% of the seasonal norm. The picture in Germany is slightly wetter with precipitation reaching 39% of the seasonal norm. These adverse conditions has resulted in production cuts for the region, the estimate for the 2018-2019 season has been revised from 21 mmt to 19.5 mmt.

The rally experienced in the market during the past month has been driven by the speculators covering their massive short position rather than a significant change in fundamental dynamics. The market still faces a number of key question in the short to medium term which include the following:

  • Speculator movement in the coming weeks and months: With the speculators posting a net long positions for the first time this year, should the market brace itself for heavy spec selling in the upcoming weeks or will the specs continue on their recent buying spree? Recent history would suggest that hard buying has often been followed by waves of selling.
  • Indian exports: With raising stock levels and limited storage capacity, it is certainly becoming a case of ‘when’ rather than ‘if’. Another key question for the Indian’s will be export parity price, should the new minimum support price of sugar be approved, we could see export parity increase to between 13.50 US c/lb -14.50 US c/lb.
  • Surplus Deficit Outlook: The market is still very much in surplus terrain despite reductions in the Brazil, European and Indian crop expectations. Recent Kingman’s analysis suggest a surplus going into quarter 4 of 2018 and quarter 1 of 2019 with the market coming under pressure from supply perspective in quarter 2 and quarter 3 of 2019.

In the face of these un-answered questions, the market is certainly in for a volatile experience in coming weeks and months.

Geran Ranganthan

Geran Ranganthan is the Export Administration Manager at SASA