Sugar: Hedgepoint reviews the harvest in Brazilian CS

China has been facing economic challenges, particularly in the real estate sector, for more than a year. These challenges include deflation and high financial leverage, as the government has relied on fiscal stimulus to spur growth. The recent escalation of the trade war with the US could potentially exacerbate these issues and highlight a worrying trend for the sugar market: a slowdown in demand.

According to analysis by Hedgepoint Global Markets, while fundamentals cannot be ignored, and the country's record production contributes to a more pessimistic outlook regarding import needs, China has not capitalized on recent import arbitrage opportunities in non-producing regions.

“Historically, even when arbitrage in producing regions remained closed, the opening of non-producing regions led to increased buying. While this does not necessarily indicate import growth beyond expectations, it would be reasonable to expect China to take advantage of recent lower raw sugar prices to buy what was already anticipated,” said Lívea Coda, Market Intelligence Coordinator at Hedgepoint Global Markets.

“The fact that it has not done so indicates that demand is actually weaker, or at least dormant, while awaiting the new Brazilian harvest. Consequently, sugar prices have had no reason to recover, remaining around 18 cents per pound while the market digests all the macroeconomic changes,” he adds.

According to Lívea Coda, in addition to the weaker demand, especially from the main importer in the sugar market, China, “the outlook for the Brazilian harvest remains positive, although we have revised our availability slightly downwards”.

The company’s report also warns that below-average rainfall in February and March cannot be ignored, as it affected soil moisture, bringing it to its lowest level in 30 years. However, when examining the Vegetation Health Index for sugarcane areas in the Center-South, calculated based on information shared by NOAA, it is clear that although the index suffered during those months, late rains in March and a near-average April helped restore plant health.

According to the data, the VHI did not exceed the baseline stress level of 40, indicating that there is no confirmation of concerns about higher water stress yet – at least for now.

“Rerunning our TCH model with updated precipitation, VHI, temperature and soil moisture values ​​indicates that the Center-South region will likely face a reduction in productivity. However, mills reported a marginal increase in area, contrary to our initial estimates, which considered a decrease due to last year’s fires and drought. Consequently, by combining a 1,1% reduction in TCH with a 1% growth in area, our cane crushing forecast was adjusted from 630 Mt to 621,2 Mt,” he explains.

The analyst also highlights that no changes were made to her expectations for sugar mix or ATR, which remain at 51% and 141,2 kg/t, respectively.

Consequently, sugar production was reduced from 43,3 Mt to 42,6 Mt, a decrease of almost 700 kt. As a result, the trade surplus was marginally reduced. Ultimately, according to Lívea Coda, Brazil continues to act as a significant bearish force in the market, contributing to the recent weakness in the raw sugar price and the inability to break above the 18c/lb level.

“Despite the positive outlook, we must be aware that initial reports on the evolution of Unica’s 25/26 harvest may indicate a lower TCH, potentially generating moments of support. However, it is already expected that the first installment of the harvest will present weaker results, as this is the sugarcane that suffered the most during its development due to last year’s drought,” he says.