Bad weather expected to support sugar rush as output drops

SUGAR prices have been trending throughout April and touched their 11-year high of US$27.07 on Wednesday (Apr 26), due to the short supply in physical markets. Futures markets were oversold, and the nearing expiry of the May delivery future contract prompted higher pay-up to cover short positions in financial markets this week, as supplies of the sweet soft commodity in cash markets are scarce.

US Sugar #11 Futures May contract rose over 24 per cent in the month of April and is up 32 per cent year-to-date. A technical chart plotted with RSI indicators shows that the trading prices coincide with an overbought RSI of 80 and thus a reversal could be on the horizon. The recent drop from 11-year highs on Thursday was probably due to the turbulent steep fall in crude oil prices, pushing sugar investors to rethink diverting the sweet commodity produce to ethanol production.

The April rally in sugar coincides with concerns that changing weather conditions could hamper sugar production in both Brazil and India, the top producers and exporters of global raw sugar. The US Climate Prediction Center has raised the likelihood of an El Nino weather pattern which could bring heavy rains to Brazil and drought to India. According to a recent weather report by Reuters, when El Nino winds blowing west along the equator slow down, warm water is pushed east, creating warmer surface ocean temperatures. El Nino’s turbulence is expected to significantly dent sweet crop production both in Brazil and India, leaving already short-stocked physical markets threatened to the core. Reduced sugar production in Europe is also a supportive factor for soaring prices.  The European Association of Sugar Manufacturers has already forecast that the EU’s 2022/23 sugar output would fall 7 per cent year on year to 15.5 million metric tons (mt).

Additionally, the Indian Sugar Mills Association (ISMA) reported last Wednesday that India’s 2022/23 (Oct 1-Apr 15) sugar production fell 5.4 per cent year on year to 32.9 million mt.  India is the world’s second-largest sugar producer and prices rallied after the Indian Food Secretary hinted that India might not allow additional sugar exports this year due to lower-than-expected sugar production. Reportedly, a massive 4.5 million mt to five million mt of India’s sugar production is being diverted to the production of ethanol in 2023, causing the surplus available for exports to fall. Given the surge in global crude oil prices, the spike in interest in ethanol production is underpinning the demand for sugar. Adding to the tailwinds in sugar prices is the rally in the Brazilian real (against the easing US dollar), breaking out to the upside and helping the soft commodity’s upswing.

Technically, sugar currently trades between regression levels of 61.8 per cent and 78.6 per cent plotted between the long-term high of January 2011 to the previous low of April 2020. On the upside, sugar will face immediate resistance at US$27 and a strategic level of US$30, while on the downside immediate support is the regression level of 61.8 per cent of US$25.7.

The writer is market analyst at Phillip Nova