Porto Alegre, August 21th, 2023 – The sugar market is heading toward a scenario of higher prices expected in the fourth week of August as well as the fifth and last week of the same month. Basically, even before the upward adjustment of more than 16% in gasoline prices by Petrobras, the sugar market was already showing a clear tendency to strengthen in the second half of August given the rains that are expected for cane fields in the Center-South and Midwest of the country. According to maps from Rural Clima, the fourth week of August should have accumulated volumes of rainfall in the range of 20 to 40 mm in areas of southern PR and northern SP.
In the center of SP, these volumes are a little smaller, in the range between 10 and 20 mm. Areas further north of SP will have incidences of 5 to 10 mm. In the fifth and last week of August, however, these rains are much broader in the Center-South and a little smaller in terms of volumes, in the range of 15 to 20 mm in areas of the center of SP and south of SP, as well as in the north of PR. Areas further north of SP must not stay without rain but at a reduced scale pattern between 5 and 10 mm. In turn, the maps for the first week of September continue to show rainfall in the cane fields of the Center-South and Midwest regions.
The indications are for volumes in the range of 15 mm to 20 mm throughout the west of SP covering areas from the north of PR to the south of MG. Only in areas further east of SP, do volumes exceed 40 mm in the weekly accumulated rainfall, but in areas without cane plantations. The result of all this is that the sugar market will basically have three straight weeks of rain. Even if it is not in volumes as high as initially predicted (between 20 and 40 mm in the fourth week, and between 20 and 60 mm in the fifth week of August), it will still rain in smaller but persistent volumes in the fourth and fifth weeks of August and also in the first of September.
The result should be upward pressure on sugar in New York and on crystal sugar in the Brazilian physical market. It is interesting to remember that, through the consulting service, SAFRAS & Mercado had already been warning about this scenario since early August, with rains forecast for the last two weeks of the month, which until then was just beginning. The alerts came both through direct contacts with customers as well as through our weekly climate report on cane fields in the Center-South and Midwest of the country. Therefore, this upward trend in climate risk and prices toward the end of August was not new for a certain part of the market. Our reading is that New York must seek 25.00 cents until the end of August for the October/23 contract.
This price was almost reached in the morning of August 17, when the asset’s highs quickly migrated to 24.75 cents, from where it only retreated due to the update of Conab’s quarterly report with the second survey of the current 2023/24 of the Center-South. In this report, Conab pointed to favorable rainfall conditions for cane plantations in the region to support its estimated increase of 13.04 mln tons of cane in the Center-South between the first and second surveys, which must go from 577.33 to 590.37 mln tons, up 2.26%. Still in early June, SAFRAS & Mercado also raised its crop estimate from 578 to 585 mln tons of cane in the crush of this crop in the region.
For sugar, Conab made an upward adjustment of 2.08 mln tons between the first and second surveys, or 5.92%, with volumes rising from 35.14 to 37.22 mln tons. The prospect of a decline in anhydrous production, of 240 mln liters between the two reports, changed from 10.55 to 10.30 billion liters. This 2.30% decline goes against the trajectory of gasoline consumption over the first half of this year, even though the fossil fuel sometimes marginally loses a few tenths of a point in its market share in the Otto Cycle. Here is another important alert from SAFRAS & Mercado.
It is quite true that the recent 16% high in gasoline prices, made by Petrobras, promoted the change of two major market paradigms. First, it enabled the unlocking of hydrated ethanol prices, which had practically completed five weeks of physical stability. Second, it set the precedent for new upward adjustments in possible scenarios of oil appreciation in the international market. Before this increase, the market did not even consider a hike in prices since the communication was clear from the presidency of the state-owned company. With this, two important problems were solved in the short term with a single measure.
At this point, the sugar market, which was already facing a scenario of strengthening in the medium term with the forecast of rains over the last two weeks of August, now had a strong upward vector in the short term, as a result of the rise in gasoline and increase in hydrated prices in the physical market. Higher hydrated ethanol tends to concentrate a larger volume in the production mix, which until then had not happened.
Therefore, with a smaller supply of cane, sugar has an additional supportive vector in the coming few weeks and months. Nor can we forget that the months of September and October should be rainier in the Center-South, with volumes of 130 to 160 mm in the accumulated volume of the month in areas of the north of PR, and in the range of 100 to 120 mm in areas of the south of SP. Regions between northern SP and southern MG should have lower volumes of rain, but still between 80 and 100 mm a month for September and October.
Therefore, the upward vectors multiply for October/23, which at the end of August should reach and consolidate 25.00 cents and evolve to 26.00 in September. For October there is the possibility of a new high between 27.00 and 28.00 cents for March/24, remembering that in September there will now be a migration of positions from the first to the second screen in New York, that is, there will be a rollover of positions from October/23 to March/24. Therefore, SAFRAS & Mercado also warns that much of the upward inflection that is projected over the months of September and October will be concentrated not on October/23 but on March/24.
In the meantime, there will also be the start of the Asian harvest calendar as a whole. In Thailand, since the beginning of June, SAFRAS & Mercado has already been warning in its daily sugar and ethanol report about the break of the level of 11 mln tons of cane to an interval between 8 and 9 mln tons. More recently, Dutch trader Czarnicow pointed to a more specific volume for the crop failure in the country, indicating that the next local 2023/24 season will be 7.2 mln tons. Even under a more stressed model of crop failure, in fact, the trend in Thailand is already known and priced in for the next season.
In turn, we have India, which will once again migrate to volumes of 30 to 31 mln tons of sugar in its next crop. This is because the 2023 monsoon rains started with an average delay of 30 to 40 days depending on producing region. In addition, usually in cases like this one of delayed start, there is also a prolonged end, usually in the same intensity of 30 to 40 days. Therefore, the monsoon rains, which usually end at the beginning of September, will last until the first half of October. With this, mills in India will have two arguments for a decline in the local crop (and obviously for higher prices).
First, the prolonged drought due to the delayed start of the rains at the beginning of the season. Second, due to the extension of the monsoon rains, which will lead the country’s cane fields to excess moisture (with a reduction in TRS levels and loss of cane quality). Besides, cane plantations will have development problems due to the low incidence of sunlight due to excessive rainfall, with the extension of the monsoons.
As a result, we will have prolonged climate risk vectors in the international sugar market throughout the third quarter of this year, both from Brazil, Thailand and India, which may even form a support for appreciation levels toward the record price of 30.00 cents when Brazil moves toward its off-season with a level of advance also of 30 to 40 days if the rains persist in November, December and January.
In this context, hydrated ethanol in the physical market should also present a very high future price curve from August onward, with levels of BRL 3.00 per liter being quickly broken in September, and with the peak of the season rising to BRL 3.40 to 3.50 in the early months of the off-season between January and February. The larger volume of cane will not be able to be fully processed due to the early rains at the end of the third quarter of 2023.
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