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China is the largest sugar importer, while the largest sugar-producing country or sugar-exporting country is Brazil, with these two countries being responsible for a large proportion of the trading volume in the world’s market, it is paramount to understand the market data and fundamentals.
For a brief understanding of the exchanges that offer white sugar futures such as the NYBOT from the United States, refer to the introduction to “White Sugar Futures from ZCE” here.
Hence, this article will cover the key pricing factors for 2022 as well as a brief outlook of sugar production and prices for 2023.
White Sugar Price 2022
A Year in Review for Sugar Commodities
From January to May 2022, domestic and foreign sugar prices fluctuated and rose. This is further exacerbated by the tense situation between Russia and Ukraine, which caused international crude oil prices to further increase.
Brazil also raised the prices of gasoline and diesel, resulting in ethanol discounted sugar parity prices to possess a higher premium than sugar prices. Consequently, international institutions lowered their estimates of Brazil’s sugar production estimates.
From June to October 2022, domestic and foreign sugar prices fluctuated and declined. Towards the second quarter of 2022, the Brazilian government implemented the fuel tax reduction policy, while Petrobras lowered the average price of gasoline in refineries several times. The lowering of gas prices formed a negative pressure on the price of ethanol in Brazil, dragging down sugar prices.
From the Asia region, India and Thailand experienced good rainfall and harvests, and the outlook for sugarcane and sugar production in the crushing season is optimistic. Overall, the market raised its estimate of the global sugar production and demand surplus for the 22/23 crushing season.
Owing to FED’s aggressive interest rate hikes, international sugar prices are under pressure and weakening. However, as the costs of external imports are high, domestic market (China) produced sugars have a competitive advantage in costs locally (in China), and the price has gained strong support. For the second half of 2022, the prospects for sugar were pessimistic as the futures price fell faster than the spot price. However, the basis has become stronger, boasting trader enthusiasm to a certain extent.
From October to November 2022, external markets fluctuated higher, while Zhengzhou’s sugar fluctuated within the range of 5500-5800, its performance seemed to portray a strong façade while being weak internally, the loss on imports accounted for more than 1,000 yuan per ton. Moving on to late November, sugar mills started to scale up in production, which will launch in large quantities in December. Hedging pressure has limited potential but the high costs of imports outside the quota have continued to receive strong support for Zhengzhou’s commodity.
Zhengzhou Commodity Exchange
Zhengzhou’s sugar statistic recorded a rise from 5650 yuan/ton to 6150 yuan/ton, while the external market rose by approximately 17.5 cents/lb to 20.5 cents/lb.
From January to May, Zhengzhou’s sugar prices rebounded to around 6100, and the spot price was relatively weaker than the futures price.
From June to October, Zhengzhou’s sugar prices dropped from 6,150 yuan/ton to around 5,500 yuan/ton, while external prices fell from 20.5 cents/lb to 17-17.5 cents/lb.
White Sugar Fundamentals
Fundamentals of the International Sugar Market
According to data released by UNICA, on November 16, a total of 517 million tons of sugarcane has been crushed in central and southern Brazil, which is a y-o-y decrease of 0.1%. On the other hand, the cumulative/total sugar production was 31.966 million tons, which is a y-o-y increase of 0.29%.
For ethanol, the cumulative production was 25.73 billion litres, a year-on-year decrease of 0.54%.
The average sugar production ratio was 46%, higher than 45.2% in the same period of the previous crop season, and lastly, the average sugar output ATR was 141.13 kg/ton, lower than 143.06 in the same period last year.
Last year, the prolonged drought in the 21/22 cropping season severely affected the yield of sugarcane, resulting in early harvesting for the crop season. In relation, this also delays the start of the crushing in the 22/23 crop season as the sugarcane will require more time to grow. Therefore, it is likely that the crushing season of this 22/23 cycle will be far behind the volume that is produced last year. In January 2023’s research report, it remains that the decline in sugar production will dampen the issuing of the second batch of export quotas.
Moreover, the Russian-Ukraine conflict has resulted in an increase in international oil prices and ethanol. Currently, producers are actively using sugarcane to produce ethanol. In the early crushing season of 2022/23, sugar production in central and southern Brazil has significantly dropped year-on-year.
While sugar production faces a turbulent start, as of November 16, 2022, the cumulative sugarcane crushing and sugar production in central and southern Brazil have caught up with the same period of the previous crop season, slightly recovering from the previous loss. This is largely attributed to the increased rainfall and soil moisture. Similarly, from November to December, the sugarcane crushing is higher than that of the same period last year. Overall factories are expected to keep up the high sugar production and a growth of 5% year-on-year to about 550 million tons is expected.
Figure 1:Sugar Futures Prices. Figure 2: Trend of Basis in China
Source: Shanghai Orient Futures
Policies and Regulatory Changes
In 2022, the government of former Brazilian President Bolsonaro reduced the fuel state tax ICMS and federal tax PIS/COFINS. The fuel ICMS state tax was limited to 17% and 18%, while the tax on gasoline prices and ethanol was waived until December 31.
Due to the government’s intervention policy in the fuel market, the value of ethanol and sugar cane dropped. As of October 2022, the policies have allowed for the sugarcane price to drop to 164.5 reais/ton, which is lower than the cost.
White Sugar Price Forecast for 2023
Apart from the current trends of the sugar prices as indicated in Figures 1 and 2, Shanghai Orient Futures analysts have also predicted that sugar cane and raw sugar production is expected to increase further into the 23/24 cropping season.
This was based on three factors sugar cane production, sugar refining ratio, and sugar output. Moreover, the increased rainfall and precipitation in August and October have exceeded the historical average level. This conducive environment to the growth of sugarcane is likely to continue into the 23/24 crushing season which will increase sugarcane yield.
According to the NOAA climate model, the probability of La Niña in the northern hemisphere winter (December-February) in 2022-23 is 76%, and the probability of turning into ENSO neutral in February-April 2023 is 57%.
If the weather remains normal as expected, then the yield per unit area in 23/24 may be further increased by about 5% to the average level in the past 10 years, which is an estimate of about 570-590 million tons. At present, other international agencies also predict that sugarcane will increase in Brazil to 565-600 million tons in the 23/24 crushing season and the mainstream estimate is 570-590 million tons.
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