A year of low prices and the oversupply of sugar in the market is getting worse, not better.
Sugar demand around the world is poor.
To resolve the current oversupply we need to draw down stocks, most probably through a production shortfall somewhere.

You may be wondering why we have been consistently bearish this year.
After all, the world is shifting back to a production deficit and there is increased weather risk in the market; that’s positive for price, right?

We are bearish because global sugar stocks are at record highs, and despite a year of consistently low prices, the Trade Flow surplus of sugar is getting worse, not better.

To put it another way, we already have too much sugar in the world, so not enough people want to buy fresh production.

Raw Sugar Trade Flow Outlook

The core problem for the market today seems to be demand.
There’s no good way to put this – demand for raw sugar has been terrible in 2019.

Global 12-Month Rolling Raw Sugar Demand

We suspect the problem runs through the entire sugar supply chain.
Re-export refiners have cut back on raw sugar shipments because the white premium doesn’t cover their costs.

The Price Over No.11 that Major Refined Origins can Supply Sugar

This is because white sugar stocks around the world are plentiful, and so refined prices are depressed.

We also suspect that global sugar consumption is barely growing, or at the very least is growing less quickly than everyone believes.
If demand remains poor, it’s going to be hard to resolve the Trade Flow surplus.
So perhaps we should be trying to understand how supply might be restricted instead?
The first problem is that Thailand and Central America have made this year’s sugar already.
Meanwhile, Centre-South Brazil is almost halfway through its cane crush.
To restrict supply we need millers to decide to sacrifice their efficiency and make more ethanol from the cane.
Currently ethanol pays around 150pts more than sugar, so this signal is starting to come through.

Relative Returns of Sugar and Ethanol for CS Brazilian Mills

However, at this stage in the season we think only 1m tonnes raw sugar supply could be lost.
Unless there is a problem with the remaining cane yet to be harvested, Brazil cannot resolve this year’s oversupply by itself.
In short, we’re locked into a surplus in 2019.
Weak spreads and a lower flat price look inevitable.

Where might we become more positive on price?
We need to look to 2020 and sugar that hasn’t yet been made.
If raw sugar supply in H1’20 is below expectations this could help drive the market higher, as this year’s oversupply can be carried to meet a shortfall
next year.
This means one of the most important things to watch today is the weather in the major Northern Hemisphere cane regions.
Thailand is the world’s second largest raws supplier after Brazil, and weather here has been drier than normal.

However, we expect Thailand to carry up to 1m tonnes of old crop raws from this year into next year; unless there is a major shortfall in next year’s cane crop, raw sugar supply will be almost unchanged year on year.

India is also a major raw sugar origin if exports are subsidised, and these raws displace Brazilian raws into the Indian refineries.
The Indian monsoon is also underperforming this year, but sugar stocks in India are so vast that we are assuming subsidised sugar exports continue into next year.

Looking across the raws market, we therefore have no reason to believe the current bear market will turn any time soon.
Let’s look at the whites instead.

White Sugar Trade Flow Outlook

India dominates all discussions around white supply.
If India subsidises exports again in the coming season, the sugar market will remain oversupplied.
If it doesn’t, the sugar market looks more balanced.
The decision to export is purely political, but given the huge sugar stocks in India and the unwillingness of the government to reduce cane prices we think subsidies will continue.
We are therefore assuming 4m tonnes sugar supply from India in 2019/20.

The only way we think this can be avoided is if the coming cane crop is far below consumption, currently at 26m tonnes.
We are forecasting a 29m tonne crop, down from 33m tonnes this year.

Thailand is also carrying high white sugar stocks, though not on the same scale as India.

We think this year’s white sugar surplus in Thailand is 1m tonnes, and much of this will be carried into 2020 and sold into the domestic market.
This, and the collapse of the white premium, may tempt Thai mills to allocate more cane to raw sugar production next year, which is helpful for the whites but does nothing to resolve the global raw sugar oversupply.
Meanwhile, the weakness in the white premium is bad news for re-export refiners, especially those without duty protection or strong market share in home markets.

This is partly a problem of high stocks; buyers don’t need to chase the market and so can wait for prices to weaken before purchasing.
This suggests lower prices are needed to keep the sugar logistics chain moving.