Sugar: Supportive scenario brings macro factors, climate and delivery, says Hedgepoint

The market started slowly last week, with most participants cautiously awaiting the release of Unica's report.

“Meanwhile, the overall environment continued to show signs of weakness, with the energy complex struggling to maintain its gains. Despite this, sugar remained resilient, supported by the ongoing drought in the Center-South of Brazil. During the first half of September, the region experienced hot and dry conditions, with no relief in sight. Low relative humidity and high temperatures in the main sugarcane producing areas raised concerns about an increase in the number of fires in the fields,” explains Lívea Coda, Sugar and Ethanol Analyst at Hedgepoint Global Markets.

As the week progressed, macroeconomic factors contributed to a more bullish outlook. The annual U.S. inflation rate fell for the fifth consecutive month to 2,5%, falling below the market forecast of 2,6%. Therefore, on Wednesday (11), raw sugar prices seemed to have found support and began to rise.

According to Lívea, the release of the Unica report the following day further reinforced market sentiment. “Although most of the numbers were in line with expectations, the sugar mix was surprisingly low. Many expected the mix to be above 49% in the second half of August, but it only reached 48,85%,” he ponders.

Regarding ethanol, the report did not add much, and the main development worth mentioning was the approval by the Brazilian Senate of the "Fuels of the Future" bill.

“Important provisions were maintained, including the requirement for up to 10% biogas in natural gas, although the Senate removed Petrobras’ R5 green diesel. The National Energy Policy Council (CNPE) will oversee increases in the biofuel blend, with biodiesel in diesel expected to reach 20% by 2030 and up to 25% by 2031. Ethanol in gasoline is expected to increase to 35%. The bill also introduces targets for the use of sustainable aviation fuel (SAF) and greenhouse gas reductions in jet fuel between 2027 and 2037,” it highlights.

If the ethanol blending mandate is set at 30% for calendar year 2025, the 24/25 crop would already be affected, with a 3% increase in anhydrous demand, from 8,4 billion liters to 8,6 billion liters.

“Looking ahead to 25/26, these changes would mean even greater demand for anhydrous ethanol, potentially putting pressure on future stocks and creating more opportunities for investment in biofuels, especially corn ethanol, whose share of total ethanol production is increasing dramatically each year,” he notes.

This news may be seen as bullish, but biofuels still have a long way to go before they impact sugar prices. During the off-season of the current season, biofuel stocks are expected to remain elevated or at average levels, suggesting that sugar prices have other potential support levels to test before hydrous prices.

“An important factor is the parity of Indian exports. For India to actively participate in the global sugar trade, raw sugar prices would need to reach 20-21 c/lb during the off-season in the Center-South,” he said.

“In the white market, the October contract has expired, with a total of 544,6kt having been delivered. This marks the second largest delivery into London on record, behind December 2020 (618kt) and almost double that of October 2022 (224kt). Three trading houses were matched with five distributors, with a diverse range of origins, even Poland delivered!” it says.

However, sugar from Indian coastal refineries constituted the bulk of the deliveries, accounting for 311,5 kt. This makes sense when one considers the level of the white premium in the months leading up to delivery, which has been corrected from USD 140/t to around USD 100/t, and that the Indian export parity for white sugar has been open for some time now, at around USD 30/t, considering current domestic prices.

“Although it may be seen as bearish, the V/Z spread showed a lot of strength in its final section, while December showed some resilience on its first day of trading, closing at 524,1 Usd/t,” he points out.

In short, as the raw sugar contract approaches its expiry, it could see a short-term rally as funds roll over their positions. This strength, however, is not driven solely by technical factors; fundamentals also play a role. The latest Unica report revealed a lower-than-expected sugar mix, while the Center-South region continues to suffer from drought conditions. Strong deliveries in London could put pressure on the white sugar premium, especially if India’s export parity for this quality remains favorable.