Ethanol prices in Brazil are still rising i.e. 4% in October after a 4% rise in September. As the Real improves after the Pension Reform approval, Ethanol prices are 7% higher equivalent to UScts/lb 14,36 for Hydrous and Uscts/lb 16,08 tell quell for Anhydrous. Ethanol prices have been stronger than Sugar since August 2017 and the average price in 2019, after the start of the harvest in April, has been UScts/lb 13,85, which is about 13% higher than Sugar.

The Thai harvest which is about 6/8 weeks ahead is expected to end lower given the poor rainfall throughout the year, lower cane prices (poor husbandry) and reduced acreage. Cane estimates range from 111 to 115 mln m/t of cane (some expect 120 mln) vs 131 mln m/t of the last crop.

The EU crop is also expected to disappoint given the lower acreage (+/- 5% lower) despite a modest improvement on Agri yields (+/- 5% higher) so total sugar production may end under 17,5 mln m/t leading to strong imports and still lower exports, likely less than 1,8 mln m/t. The EU current sugar stocks are similar to last year, about 2 months of sugar demand.

The end of the Australian harvest is approaching and will likely result in a 10% drop on production given the lower rainfall, perhaps close to 4,1 mln m/t.

We are seeing higher production in Russia, perhaps close to 6,8 mln m/t, which is putting pressure on the domestic market and we may see higher exports in the coming months, perhaps beyond the usual CIS markets.

We can see that lower Sugar prices in the past 2 years and weather are leading to lower Sugar production, a drop of 7 mln m/t YoY, and given that Sugar consumption is 1,8 mln m/t higher, we are heading to a deficit of 5 mln m/t vs a 4 mln m/t surplus the year before.

What may happen beyond April 2020 is yet to be determined, as based on prices, acreage and assuming reasonable weather, we may have another deficit year. We do, of course, have time to erase that possibility giving the ability for Brazil to switch back to Sugar from Ethanol, however prices need to improve.

On a different note, it is also good to highlight the ‘desire’ the Funds had to position themselves short in Sugar since May 2017.

Looking back to 2015, Sugar prices were falling and reached an average of UScts/lb 11,56 during Q3 2015 just ahead of the Brazilian Sugar Dinner. The average net short position of Funds was 65k lots during July 2014/Sept 2015.

At that time (due to lower prices and weather) there was talk of a possible large deficit and Funds started covering shorts and going long. Well, we know what happened, by Oct 2016 during the Sugar Dinner in London, prices had already reached UScts/lb 23,00 cts (the high for the year and the highest price since). The Funds net position was 164k lots net long during Oct 15 to April 17.

The current net average position is 108k lots short since May 2017 and the current net short is at 186k lots. Just food for thought!

Alberto Peixoto E: T: +44(0) 7570 714 981

27 | ADMISI - The Ghost In The Machine | November/December 2019

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