Czarnikow Raw Sugar Price Outlook
- We remain bearish but there is an increased risk in the sugar market today.
Quarterly Trade Flows
Raws Flat Price View
Short Term – N’19
The fundamental outlook is negative; there is too much sugar in the world today. However, in the short term we think there’s a chance the market strengthens back above 13c.
We think that increased weather risk in the sugar market and broader commodity strength could lead to further speculative buying, reducing the size of the net speculative short position in the market.
Any market strength is likely to be short-lived. The amount of producer hedging still to be done outweighs the amount of speculative buying required to kill the net spec short. Speculators were last-reported to be short 159k lots (see our Sugar Futures Positioning Report). We estimate producers still need to sell another 235k lots (12m tonnes) raw sugar in the next 9 months. Producer hedging will increase in intensity as the market rallies.
The July futures contract expires at the end of the month. There is plenty of availability for the expiry from Central America, Brazil and Thailand. Is there a Trade receiver willing to ship large tonnage? If not, the N/V spread will need to weaken to encourage longs to roll their sugar into the second half of the year.
Medium Term – V’19
The market is oversupplied with sugar and so our belief is that prices will weaken in the medium term. Hopefully this is familiar to regular readers – we think 3m
tonnes surplus raw sugar is available to the market in the next 9 months from Thailand and Brazil. Prices need to weaken for this sugar to be sold, or to encourage mills to make more ethanol from their sucrose.
However, there are several new risks emerging which might change how we look at the market.
The first is the weather. As we’ve highlighted previously, key reservoirs in the Indian state of Maharashtra are dry, meaning cane cannot be irrigated. The monsoon is currently late. This means Maharashtra and neighbouring Karnataka will make less sugar in the 2019/20 season. We think India will still make excess sugar next season, but a very deficient monsoon could mean it does not. Thai cane development could be similarly impacted by hot and dry weather.
The second risk is Indian supply to the world market. Indian domestic prices are at $460/mt, so a subsidy is required for India to export. We think India will continue this year’s subsidy next year and the country will supply 4m tonnes sugar to the market. However, these subsidies are being challenged at the WTO. The Indian Sugar Mills Association also recently asked for a support package for the industry which is “WTO compliant”. The Union Commerce Minister said last weekend that India should move away from export subsidies to an export credit system. If subsidies are not forthcoming next year, the sugar market will not be oversupplied and prices will strengthen.
Long Term – H’20 onwards
Even though global sugar production in the 2019/20 season is likely to be below consumption levels, sugar stocks around the world are so large that we think the market will
continue to be oversupplied into 2020. Therefore, the biggest risk to our long-term negative view on price is adverse weather, as discussed above.
