World Sugar Market – Weekly Comment – Episode 58

Market coming up on the production cost

Once again the sugar futures market in NY gave back just about everything it had recovered the previous week and closed out Friday with October/2022 at 18.03 cents per pound, hitting a 57 point drop, equivalent to 12.50 dollars per ton, in the weekly accumulated.

The deferred futures contracts also showed devaluation around 60 points (13.50 dollars per ton) reflecting a total discouragement from the mills in relation to the ethanol price, which motivated a greater pressure on sugar sale.

The situation changed in such a sudden and unusual way that it caused huge losses to the mills after the changes in fuel tax. The companies’ budgets showed estimated average sale prices for this second semester at about R$4.000 per liter and now these estimates are below R$3.000, an unexpected 25% reduction, impacting the investment power (due to the decrease in cash flow) and the urgent change – wherever it was possible – in the ethanol mix for the production of more sugar. Liberal government is something else.

Ethanol, whose performance this year had been expected as being the “crop saver” by the mills, unlike export sugar, whose pricing had long been advanced, spoiled the mood of the companies. The drop in revenue postpones expansion, cane field renewal, different investment plans inside the mills with smaller distribution of dividends and bonus to the executives. Everyone has a different sad story to tell.

Taking into account that the Center-South has already crushed more than half of the sugarcane of this crop, a meaningful part of the planning has to be reviewed given the strong ethanol drop on the market. The drop was strengthened by the damming of new businesses right after the tax changes and – evidently – the collapse in fuel prices. The price of the oil barrel dropped below the level before the Russia-Ukraine conflict, which shows that the market has only gone up due to the panic and that oil availability around the world is doing pretty well. It was obvious but reason goes on vacation under war situations.

The fact is that the market will have to adjust itself sometime. Our view is this will happen after the next president has been elected. The mills that have kept ethanol in tanks shouldn’t sell the product. B3, the Brazilian Exchange, is trading ethanol for the first 2023 quarter at R$2.860 per liter. At current value, this is sugar in NY at 16 cents per pound, that is, more than 200 discount points. It doesn’t seem to make any sense, because it is below the production cost.

Of course the markets can drop even further, since highs and lows are always exaggerated when they are affected by the panic. But what are the actual chances of sugar staying at this level for a long time if it drops below 17 cents per pound in NY? How would India be able to export without subsidy at this level? How about Thailand? Even Brazil, taking into account the production cost calculations done by the top mills, considering depreciation, amortization and financial cost, adds up to 17 cents per pound FOB Santos. Price readjustment will have to occur somewhere down the line.

On the other hand, natural gas price on the world market has gone up by more than 6% this week. In the monthly accumulated it comes to 13% and in the yearly accumulated it comes close to 150%. Just think about the impact this increase should have on beet sugar production cost in Europe. Meanwhile, the refineries in the Middle East and Northern Africa get a jump on it and buy raw sugar from Brazil and India so as to get ahead of the possible strengthening of the white premium. Raw sugar demand in the physical should create higher premiums for next shipments. And the refineries in those regions want to take advantage of these prices as soon as possible.

The non-index funds have reduced their short positions by 40,000 contracts. No wonder we saw sugar prices in NY go up over the Tuesday to Tuesday period. They were not hidden fundamentals, but the funds getting off the position. Now they are short by just 23,000 lots, that is, the market might fluctuate less, but first there is the question: what level will NY stabilize at?

As an important pushback on the bears, we must remember that the Center-South crop is headed for a total crushing close to 527-530 million tons – a smaller number than that estimated at the start of the crushing.

We believe that with the stagnation of the Brazilian ATR production since 2009/2010 due to the possibility – still truly small – for global economy recovery, world sugar consumption resumption (led by Asia) and Otto Cycle consumption damming in Brazil, which before the pandemic had been growing by 3.8% per year, Brazil won’t have enough sugarcane to meet this possible internal and external consumption increase from the 2024/2025 crop on. It’s difficult to be bearish in the long run.

You all have a great weekend.

To read the previous episodes of World Sugar Market – Weekly Comment, click here

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