Porto Alegre, May 22th, 2023 – Fundamentals from Asia are opposed to those from Brazil’s Center-South; NOAA points to El Niño and raises climate risk in the market; Recent history throws great uncertainty and skepticism about the effects of this phenomenon; USDA orders industry to use less sugar in food as US stocks rise
The end of May has been an interesting period for the structural vectors of sugar price formation in New York. We have a range of mixed signals that leave the prices of the current spot contract, July 2023, with no defined direction except for a short-term sideways channel over the top of the 11-year highs, which only reinforces this perception. On the side of market support vectors, we have in the foreground (in order of appearance) the fall in the Indian crop (from 38 to 36 mln tons), which was recently reinforced by USDA indications of an increase in local consumption (from 29 to 31 mln tons).
Then we have the delay in the start of the cane crushing in Brazil’s Center-South due to the rains in April, which still have not brought the VHP and crystal sugar supply back to the levels usually seen at this time of year. We also have indications from the NOAA, which from April to May raised from 75% to 95% the probabilities of an El Niño between August and September this year, which, according to the agency, causes “rain heavy in Brazil and drought in Asia.” Taking this NOAA indication literally, we have yet another support for prices in New York to sustain themselves around 26 cents, the highest level in 11 years.
The great detail is that, if we remember the year 2016, we will see that it was a period of occurrence of the so-called “monster” El Niño, which was an occurrence of this phenomenon with an intensity three times greater than normal. In the graph, the heating curve of the Pacific waters shows an almost exponential increase, which is the reason for the name “monster” in the characterization of that year’s event. The great detail of the monster El Niño year was that during this period the cane crop was absolutely normal. There were no records of drought, delayed or prolonged rains, or even frosts. To complete this statistical sampling, we have another example.
Looking back two years ago, we can see that the 2021/22 season was a period marked not only by a record-breaking but also historic crop failure. It was a season when the volume of cane production in the Center-South subtly dropped from 605 mln tons in the previous season to around 524 mln tons. Once again, we have the great detail: in that year neither El Niño nor La Niña was registered. Of course, our analysis takes into account the effects of these two phenomena on cane, which is a semi-perennial culture. The effects on annual crops such as soybeans, corn and wheat are not being called into question in this context. We have two more important facts about this. The first one is the USDA indication of “heavy rain” in Brazil as an effect of El Niño, which, according to the department, will start between August and October.
The detail is that exactly in this period the Center-South begins to approach its rainy season, which runs from November 2023 to March 2024. In other words, basically NOAA is saying that the rainy season in the Center-South will indeed be rainy. We will not go into detail about the term “heavy” that NOAA used to describe rainfall, since it did not explain which volumes of precipitation are considered “heavy.” However, there is a warning that in October and November the rain may arrive earlier on cane fields in the Center-South, and with that, the harvest will end earlier, by 30 to 40 days before the official calendar, which is in December.
This would soon culminate in a very high volume of cane remainders from one crop to another, and the 2023/24 season would have started later and ended earlier. But it is still too early to say that, we are only getting into NOAA’s line of reasoning. For India, NOAA says that El Niño will bring drought after August or October, while the Asian Monsoon season begins in June and extends through September. So, NOAA is simply saying that by the time rains generally stop in the region, there will be little rainfall. Once again stating the obvious.
In the United States, from the perspective of the vectors that limit hikes, we have the USDA recommendation on the need to use less sugar in industrialized food products, mainly in flavored milk and other foods that make up the diet of children in public schools in the country. The detail is that this USDA recommendation comes two months after the federal entity itself warned that sugar beet stocks used to manufacture sugar are at record levels in mills. Therefore, we have a scenario of high stocks of raw materials and a recommendation to reduce the use of sugar. This should be a strong downward vector in the US demand in 2023, which in recent years has fluctuated around 11.3 mln tons per crop.
Finally, we note that the July 2023 contract has developed a sideways channel in New York since the beginning of the second half of May, which must remain oscillating within its limits until early June. Occasional tests of support and resistance of this channel are normal. The detail is that only between June and July will the supply of VHP sugar from the new crop in Brazil’s Center-South reach the foreign market with relative comfort, alleviating the perception of shortage of supply originated from the decline in India’s supply, which also coincides with the increase in the country’s domestic demand. But after July at the latest, Brazilian supply will invariably hit the market and drive the July 2023 prices back to their 100-day exponential moving average that currently hovers around 22 cents; that is, it will be a long tumble for the July contract. Another detail is that in this period this asset will no longer be the driver contract, with the position moving to October 2023. That is, in addition to everything that we have already listed, there will also be natural pressure on July 2023 due to the rollover of positions from the first to the second screen.
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