Sharp dip in Brazil sugar output sends futures soaring

25.10.2017

Raw sugar futures bounced back above 14 cents a pound after data showed an unexpectedly weak start to October for Brazilian output, undermined by a drop in cane quality as well as a switch by mills to making ethanol.

Raw sugar futures for March jumped 2.9% to 14.28 cents a pound in New York, closing above both their 10-day and 20-day moving averages for only the second time in the past month.

The gain followed the release by Unica, the Brazilian cane industry group, of data showing that mills in the country's Centre South region, responsible for more than 90% of domestic output, produced 1.98m tonnes of sugar in the first half of this month.

That represented a plunge of more than 30% on output in the second half of September, besides being a 12.3% drop year on year.

It was also below the figure of 2.03m tonnes that investors had expected, according to a poll by S&P Global Platts.

'Significant reversal'

Centre South mills, in crushing 32.4m tonnes of cane in the first half of this month, in fact processed some 400,000 tonnes more of the crop than expected by investors, who had estimated at 3.2 days the time lost to the return of rainy weather, according to the S&P Global Platts poll.

However, the quality of cane, although it typically declines at this time of year, particularly when rains depress sugar levels, fell far further than had been foreseen.

The so-called ATR – the level of recoverable sugars in cane– fell to 146.4 kilogrammes per tonne of crop, down 7.0 kilogrammes from the figure in the second half of last month, and some 3.6 kilogrammes below forecasts.

And a lower-than-expected proportion of these sugars were directed to sweeteners, which accounted for just 43.8% of cane crushed, down 4.0 points from the figure for the second half of September, and below market expectations too.

"The data verified reveal a significant reversal in the production mix in favour of ethanol," Unica said.

'Silent tug-of-war'

The drop in sugar production comes despite a relatively slow rate of seasonal shutdowns by Centre South mills as the rainy season approaches, and cane supplies run low.

As of October 15, 18 mills had closed, compared with 32 sites as of the same time of 2016.

The data come at a key time for the sugar market, which is marked by large speculative selling, but the weakest rate of hedging by producers since 2011 – a sign of mills waiting for higher values before pricing output.

Marex Specton said earlier this week that "there is a silent tug-of-war taking place between the funds, which are extremely short, and the producers who are correspondingly long, ie under-hedged".


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