Market must correct sugar and ethanol prices

The week of July 3-7 began with ICE confirming a below-average delivery. Although it was already expected due to the behavior of open contracts in the previous week, the fact that only 412kt were delivered added support to the October contract: demand was hotter than many believed. This news, combined with the 4th of July holiday the following day and the recent appreciation of the real, were enough to offset the possible drop that the improved Indian monsoon could have on raw sugar prices during the first days of the week. While many remain concerned about sugarcane development in India, more rain, especially when needed, always sets a bearish tone.

Improved precipitation in the country is one reason why we expect a short-term price correction, and the moderate rains observed during the beginning of the second half of June in Brazil's CS is another. Although the beginning of the fortnight was rainier than expected, its last days were quite dry – just like the beginning of July so far. This raises milling expectations for Unica's next report, which means more availability of the sweetener in the near future.

Also in Brazil, the additional change in fuel taxation, specifically the combination of an increase in state taxes on ethanol with the reestablishment of federal taxes (expiration of provisional measure no. 1.163, of 2023) could mitigate some of the recent gains in the competitiveness of hydrous. , bringing pump parity closer to energy equivalence (70%) in the main consumer states.

The 70% pump parity ends up working in favor of gasoline demand, keeping sales expectations in the domestic market stable. In this sense, anhydrous should continue to gain share in trade, along with gasoline. Unless a new tax movement is observed, Unica's next reports should confirm this view.

The fragility of the biofuels market gives mills even more comfort in maximizing sugar – a behavior that is unlikely to change anytime soon. Therefore, the sweetener market has not seen any recent bullish news, leading us to expect further corrections. From better than expected productivity results in Europe, to positive expectations regarding production in Russia, prices remained supported in the physical tightening.

Therefore, Unica's next report could shake up the market if we don't already see a correction by its release later this week. In the meantime, we must remain vigilant regarding the development of rainfall in Southeast Asia. The weather is expected to remain favorable in North India (Uttar Pradesh) and Southwest (Maharashtra, Karnataka) – key producing states. In Thailand, the weather is expected to improve over the next 14 days; however, most sugarcane areas are behind in terms of grass development.