Sugar and Ethanol Weekly Report

By: StoneX Intelligence Brazil, StoneX Intelligence Brazil

Fri, 11 Mar 2022, 19:30

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Estimates for sugar production in Center-South Brazil and globally

Marina Malzoni

marina.malzoni@stonex.com

Arthur Machado

arthur.machado@stonex.com

Updated impacts of the Russia-Ukraine conflict on the sugar industry

Last week, StoneX’s Market Intelligence released new estimates for the 2021/22 and 2022/23 crops in Center-South Brazil, as well as a review of its projections for the global sugar balance in the current international cycle. Among the main points discussed in this analysis, productive prospects for Asia were a highlight.

For Thailand, the market had been waiting for firmer production, with our projections moving close to 10.7 million tonnes of sugar, but with some indications already pointing to even more abundant supply, reaching 12 million tonnes of sugar in 2021/22 (Oct-Sept). While the production scenario was favorable, amid attractive prices and planted area gain, excessive rainfall has damaged harvest progress in major producing regions.

The Thailand Meteorology Department (TMD) forecasts above normal rains over the next quarter, which should cause additional disruption of field work in the Central and Northeast regions of the country. Based on this, StoneX cut its projections for sugar supply in the current cycle by 7.5%, which is expected to be 9.9 million tonnes, a 31.1% annual increase. The forecast of regular rainfall, on the other hand, should contribute to the development of cane fields that will be processed in the next cycle.

In contrast to the hardships faced in Thailand, the current crop in India is marked by greater productive potential for sugarcane. So far up to February, about 25.3 million tonnes of sugar have been produced in the country, representing a growth of 7.7% compared to last season. In light of the productivity gain and beneficial weather for harvest to progress, we have raised our estimates for Indian supply, by 5,4%, to 33.2 million tonnes (white value).

Estimated sugar production in India and Thailand (million tonnes)

*Estimated. Sources: ISMA, TSMC & StoneX. Design: StoneX.

This volume is 6.5% higher than that observed in 2020/21, and it already disregards the use of 3.0 million tonnes for ethanol production. With the firm crude oil rally in recent sessions, it seems likely that New Delhi will seek to invest even more to reach E20 by 2025.

Given this context, the current great discussion revolves around the potential for sugar exports by India in the current cycle. Official estimates point to 7.5 million tonnes being directed abroad in 2021/22, since contracts for 6.2 million have already been signed. Taking these points into account, and assuming domestic consumption of 27.2 million tonnes, it seems likely that ending stocks will end at 6.8 million tonnes.

However, StoneX contacts in Asia already indicate the possibility of exports reaching 8.0 million tonnes in the current season. If that level is reached, ending stocks may be 6.3 million tonnes. Although it is the lowest in recent years, there is room for international sales to remain strong, especially in the short term amid firm appreciation of sugar futures, which should alleviate the deficit in the commodity’s global balance.

On Friday (11), the #11 front-month contract posted a slight weekly loss of 0.6% on the ICE/NY, closing the session quoted at 19.24 c/lb. In light of this move, India’s export parity against raw sugar, which is 19.80 c/lb, is already closer to opening. In parallel, the #5 K2 contract closed the day at USD 530.20/t, which was USD 94.7/t higher than the level that makes white sugar exports viable by India. Based on this, we increased our projection for the global sugar balance by 800,000 tonnes for 2021/22, projected to reach a deficit of 1.1 million tonnes.

Estimated global sugar balance by crop (Oct-Sept) – million tonnes

Source and Design: StoneX.

The perspectives regarding supply from Center-South Brazil are also highlighted in this context. Although the expectation is for a recovery of the region’s sugarcane fields’ productivity in the 2022/23 crop (Apr-Mar), attention is focused on the plants’ decision of the productive mix, with the firm appreciation of crude oil being a point of discussion. After reaching a difference with the international market above BRL 1.20/liter, Petrobras released a new positive readjustment of gasoline prices at refineries by BRL 0.6093/liter, effective from last Friday.

Of course, this price review will act as a support factor for ethanol quotes, especially amid the prospect of higher alcohol consumption over the next cycle in the sugarcane belt. So much so that the price of ex-mill hydrous based in Ribeirão Preto had a weekly increase of 14.8%, closing Friday (11) at BRL 4.10/liter.

Ex-mill ethanol price* (BRL/liter)

*Ribeirão Preto/SP. Source and Design: StoneX.

As a result, hydrous started to operate with a 0.8% premium compared to #11. However, it is important to reinforce that more than 76% of estimated sugar production for the 2022/23 season is fixated for export in New York, compared to about 70% in the previous cycle. In this sense, a mix reversal would only be possible if the ethanol price rose to levels that would make up for the costs involved in the operation. Taking these points into account, we maintained our sugar-directed mix projection at 45.5%, resulting in sugar production of 34.5 million tonnes between April 2022 and March 2023.

In addition to the developments of the crude oil market, tensions between Russia and Ukraine also dictated the rise of corn futures in Chicago, in light of logistical barriers in Ukraine and the prospect of lower corn exports to the country in the current crop. In addition, corn also found support in concerns about other players’ production, especially Brazil.

Although the crop has been planted within the ideal window, the market is attentive to below-normal rainfall forecasts in important producing regions over the next quarter. This, together with the expectation that Brazil will allocate a greater volume of corn abroad, may pressure internal availability, which becomes a point of attention for the corn ethanol sector.

However, domestic corn prices have not risen so significantly in recent weeks, since domestic buyers are reluctant to accept higher levels. As a result, the margin of corn ethanol units in Mato Grosso declined by 10.5% in the monthly comparison, to BRL 546.3 per tonnes of the grain, a level that still stands above that observed in recent years.

Corn ethanol production margin in Mato Grosso (BRL/tonne of corn)

Sources: Cepea, CCEE & StoneX. Design: StoneX.

Furthermore, our expectation is that the impacts of lower corn availability will be absorbed more by the livestock sector, given the recent economic situation and its negative impacts on domestic demand for meat. As such, we kept our estimate that 4.2 million m³ of ethanol will be produced from corn in 2022/23 (Apr-Mar), a volume that responds to the attractiveness of the operation, as well as to new projections of increased distillation capacity in the Center-South of the country.

Monitoring the conflict between Russia and Ukraine will continue to be on the radar, in order to assess the impacts on the oil market and, consequently, its influence on the decision of the mills’ productive mix. In the case of sugar, attention is focused on beet planting in Ukraine, which can be hindered if the conflict continues in the coming weeks.

Outlook and CFTC

Last Friday’s CFTC COT O report showed that speculators sharply increased their long balance by 144.4% on the week that ended last Tuesday (08), to 139,312 lots.

With this, between March 01 and 08, the #11 front-month contract rose by 5.9% on the ICE/NY, reaching a high of 19.43 c/lb. In addition to reflecting the increase of long bets by specs in the reference period, the raw sugar rally continues to respond to the Russia-Ukraine conflict.

Index funds also increased their long balance in the period, which reached 202,828 contracts, accumulating a positive weekly change of 3.5%. On the other hand, commercial agents raised their net short positions to 342,139 lots (+35.2%).

After the report’s reference date, raw sugar’s K2 posted losses of 1.0% on the US exchange, a move that also reflects profit-taking by the agents.

Indicators

Renewable Fuels

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