Raw sugar futures fell below 16 cents per pound this week, closing at 15.9 cents amid mounting bearish pressures from increased supply expectations and negative fund positioning. However, a critical medium-term development in Brazil could reshape market dynamics as ethanol profitability now significantly exceeds sugar export returns.

Multiple supply pressures weigh on prices

Fund positioning turned increasingly negative, with net short positions expanding 13% to 149,759 lots on September 2nd as speculators anticipate further price declines. Supply concerns have intensified from two key sources: revised Indian export expectations now anticipating 4 million tonnes versus earlier forecasts of 2 million tonnes, and robust Brazilian Center-South crushing activity maintaining unexpectedly strong sugar allocation ratios around 55%.

The bearish sentiment reflects an already oversupplied global market facing additional volume from major producing regions.

Brazilian mills face profitability crossroads

Despite current supply pressures, Brazil’s widening ethanol-sugar profitability gap presents a critical medium-term development. Biofuel now trades at significantly higher levels than sugar exports, raising questions about sustained production allocation as the campaign enters its final third.

Brazilian Center-South mills crushed 50.1 million tonnes of cane in the second half of August, up 10.7% year-over-year. Sugar output increased to 3.9 million tonnes, while ethanol production fell to 2.4 billion litres. The sugar mix reached 54.2% compared to 48.8% last year.

However, mills are reconsidering their sugar-ethanol production split as weakening global prices make ethanol more financially attractive. With Center-South cane crushing forecasts of 590-610 million tonnes, producers may favour ethanol operations in major states, potentially yielding less sugar than the projected 39-41.4 million tonnes.

Export patterns show mixed signals

August sugar shipments from Brazil totalled 3.74 million tonnes, declining 4.5% year-over-year despite remaining 15.7% above the 2021-2023 monthly average. China led destinations at 943,000 tonnes, followed by Indonesia and India.

Cumulative exports from January-August reached 20.2 million tonnes, representing a significant 17.3% decrease versus the same period last year. Early September shipments started weak with 1.53 million tonnes exported in the first 10 working days, marking a 17% decline.

European markets maintain stability

European sugar markets show stability with comfortable production levels. Harvest operations are underway with favourable weather conditions, though overall yields remain similar to last year. Germany shows concern due to lower yields, while the Netherlands and Poland report increases.

The Vesper Price Index shows West-EU at €575/mt DAP and South-EU at €630/mt DAP. Surplus EU producers are strategically redirecting volumes to deficit markets like Spain and Portugal at discounted prices around €560 delivered.

Market outlook reflects competing dynamics

Brazilian sugar markets face near-term bearish pressure despite strong production, as export volumes decline from last year’s elevated levels. However, the medium-term outlook could turn more bullish if mills shift toward ethanol in the campaign’s final third due to better profitability.

For procurement managers, current price weakness presents opportunities, but the potential for Brazilian production shifts suggests careful monitoring of ethanol-sugar profitability relationships will be critical for timing purchases.

This article is part of a more comprehensive market analysis. For the full analysis go to: https://app.vespertool.com/market-analysis/2286