The market outlook is binary.
If India subsidises sugar exports for 2020/21, there will be enough sugar in the world to meet demand at today’s prices.
If India doesn’t subsidise sugar exports, higher prices are likely.

Raw Sugar Supply in 2021

We are assuming 2.6m tonnes of Indian raws supply for the world market in H1’21.
The world market would barely be adequately supplied if this happens.

However, if India doesn’t export raw sugar in 2021, the world market would be undersupplied.
Centre-South Brazil and Australia will have finished their cane harvests and will be exporting the last of their old crop sugars.
Thai raw sugar availability will be low.
Central American raws will largely flow to East Asian refiners under trade deals.

Raw Sugar Demand in 2021

We’ve been wondering what may happen to global sugar demand now prices are more than 60% above this year’s lows.
The commercial long position in raw sugar has been falling, which shows that physical buyers haven’t been chasing the market higher.
This year’s major buyer of raw sugar has been China, where imports have been partially deregulated.

China will import a record 5m tonnes of raw sugar this year, and we think it could import a further 4.5m tonnes next year.
China has also bought 20% of CS Brazil’s raw sugar so far this season.

The only other time we’ve seen a single buyer take so much Brazilian supply was in 2009/10, when India pushed the world market towards 30c.
However, Chinese buying will be price-dependent.
Chinese refiners were active buyers of raw sugar at around 10c this year, but won’t have made fresh purchases recently.

We think the raw sugar market would need to fall significantly for Chinese refiners to buy further tonnage for 2021.
At current prices, they will instead run-down bonded stock for next year’s needs.
It’s a similar story for destination refiners.
Many have no flexibility in their operations.
But some refiners have a large enough raw sugar storage that they can flex their offtake according to the market structure.
H/N at +155pts makes it hard for these refiners to make an acceptable return, so we’d expect their raws demand to reduce.

Nevertheless, if India doesn’t export, the pressure on the start of next year’s CS Brazilian crop in May would be immense.
This is where the world’s pent-up raw sugar demand would appear.
We think raw sugar stocks in April 2021 will be among the lowest we’ve ever seen.

Any delays to cane harvesting in the region could make raw sugar availability even worse.
Typically, sugar and grains compete for elevation at the ports in May, June and July.
All of these risks are already being reflected in the K/N spread at 65pts.

If India subsidises sugar exports in 2020/21, then today’s sugar prices are probably too high, the speculative momentum would be difficult to sustain, leading to a burnout.
We would need to see the market fall to a level at which physical buyers re-engage.
We don’t think the market would fall below 12c because the sugar market cannot afford for Brazilian cane mills to buy back sugar hedges in 2021.
If India doesn’t export, there is a risk the raw sugar market strengthens towards 19c, which is the level Indian mills could export without an export subsidy.
The answer to the sugar market is in Narendra Modi’s Cabinet’s hands.

The prospect of raw sugar heading towards 19c is concerning because of the huge imbalances in market positioning today.
Brazilian sugar mills have been taking advantage of record high sugar returns to lock in prices for 2021 and 2022.
This is reflected in the vast commercial short positon in the market.

These short positions were largely placed between 14 and 15c and are now being held and margined by Trade Houses.
The other big fish in the raw sugar pond are the speculators.
Speculators have been buying the sugar market since April, when prices recovered back above 10c.
Since this time, they’ve aggressively added to their positions.

For only the second time ever, the speculative long now exceeds the index and commercial long positions.
The gross speculative long position is also above 30% for only the second time ever.

The only other time this has ever happened was in 2016.
This suggests that speculators are already over-extended with the market at 15c and a period of consolidation would be healthy.
However, 2016 tells us to be careful.
That year, the speculators held an outsized position for 31 weeks, during which time they drove the raw sugar market from 16c to 24c.

Source: Refinitiv Eikon

There’s no reason they can’t keep their outsized position this year; it’s completely in the money today.
Every point the market rallies means more margin for the Trade Houses to pay.

Source: Refinitiv Eikon

Perhaps the ultimate buyer of raw sugar in a blow-off top to 19c would be a Trade House, which is unable to meet its margin calls, leading to a forcible buy-back?

The Indian government cannot allow stocks to build to unmanageable levels because this will pressure mills’ cash flows, meaning cane farmers won’t be paid.
This is politically unacceptable.
Equally, India’s ethanol programme isn’t large enough to soak up spare sucrose yet.
India believes WTO rules allow it to continue to subsidise exports until 2023.
All the Government needs to do to ensure mills have sufficient liquidity is take last year’s export subsidy rules and apply them to this season too.
We think the notification will be approved in the second half of November, giving cane mills enough time to make raw sugar for export.

What does this mean for risk management? Producers with further tonnage to sell for 2021 should continue to sell.
Current prices should lead to excellent margins and it’s not worth gambling to try to achieve the very top of the market.
Consumers should seriously consider adding to cover if the market trades back towards 12c.

A final thought on the white premiums in 2021.
After all, the bulk of India’s sugar supply will be white sugar if exports are subsidised next year.
Without cheap Indian white and refined sugar, the white sugar market will be reliant on re-export refiners, and they have a higher cost of conversion than those who make white sugar from cane or beet.

If there is no subsidised Indian sugar in 2021, we think the white premium will need to trade between $90-110/mt to ensure sufficient supply.
If India does subsidise sugar exports, the function of the white premium will be to reduce supply from the world’s re-export refiners.
This suggests the white premiums in 2021 should trade between $60-80/mt.