Chart 2: Non-Commercial Net Length vs ICE Sugar No.11
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10/2017 Source: ADMISI Sugar Desk
Last year there was much chatter about Indian production being sharply lower than the previous record production due to a poor and sporadic monsoon which helped trigger the fund short covering. Currently, there is much talk that 2019/20 Indian production could be up to 20% lower than last season due to drought before and flooding during the monsoon. Last September, Brazilian CS sugar production was running well below the previous year’s record production as mills switch to ethanol production. This year sugar production is even lower than this time last year, as mills continue to see far better margins in ethanol. This time last year several analysts believed a small global supply deficit would be seen in 2018/19. Record Indian sugar production soon changed this view. Currently, nearly all supply/demand calculations point to a global deficit of around 3-5 million tonnes in 2019/20.
So will the raft of similarities mean the market is about to see a substantial rally? Before making any predictions it would be wise to look at the differences between last year and the present day. One reason why the October rally last year was not sustained was because predictions of lower Indian sugar production turned out to be very wide of the mark. In the end India produced a record amount of sugar and some 15-20% more than predicted. This has led to a huge build-up of stocks in India. So much so that the Indian Government has announced their desire (and help) to export 6 million tonnes next season. Their break-even price should mean Indian selling will appear well before the highs of last October rally are reached. Additionally, around the same level Brazilian ethanol parity will be reached, in part, due to the current weakness of the Brazilian currency although it is very unlikely this pricing will be done against March. Currently, physical demand is tepid at best with most end-users in no serious hurry to buy.
In summary, logic does suggest a rally is on the cards. Prices are near multi-month lows, the funds are very heavily short, the October contract is about to expire and it is more than likely a global production deficit will be seen next season. The extent of the rally will be determined by where the major producers choose to price. That will be certainly above current levels but probably rather lower than the highs of last year’s rally. Unfortunately, futures markets do not always adhere to logical reasoning so nothing is guaranteed. Nevertheless, traders will be hoping they soon suffer a bout of Déjà vu.
Howard Jenkins E:
howard.jenkins@
admisi.com T: +44(0) 20 7716 8598
04/2018 10/2018 04/2019 Non-commercials SUGAR No.11
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15 | ADMISI - The Ghost In The Machine | September/October 2019
Thousand Contracts
usc /lb
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