Raw Sugar switching from Carry to Backwardation: Brazil

In Grain exports in the ECSA http://wp.me/p3k7lL-5W  we saw that congestion and seasonal demand affects the USG/Japan Panamax HSS index. 

Impacts on Sugar

The port congestion in Brazil due to Oilseeds export also affects another major Brazilian cash crop; raw sugar cane.

In March and April, raw sugar for May delivery become more expensive than the futures for July, a so-called backwardation which may signal limited supplies.

It is an example of `”relative scarcity”,  probably the most important factor in commodities.

You may have reasons to ask if port congestion will not be exaggerated by some market players who have an incentive to create this situation as Sugar has hit a two-and-a-half-year low and prospects of large supplies from Brazil continue to loom on prices. However, it can an still be very rainy in many regions until June. When the ports are wet, loading of sugar stops.

Sugar Freight.

Sugar represents an important minor bulk trade that can actually be divided into three categories: raw sugar (which is shipped loose in bulk); refined sugar (which is generally shipped in bags); and molasses (which is a by-product of the sugar refining process and is shipped in tankers). The main loading areas for both raw sugar and molasses are various developing countries, as well as South Africa and Australia. Although the largest producers are Cuba, Brazil, the Philippines, the Dominican Republic and Australia, one third of the trade is made up of very small exporters in tropical areas. Loading facilities are frequently very poor and, because the trade is seasonal and highly fragmented, there is little incentive to improve them. As a result, the trade is still largely restricted to small ships.

A Rush: waiting lines for delivering their loads.

According to a farmer/trader the surroundings of Frederico Westphalen, South Brazil:

-There is a nightmare to move anything out of Santos, up to 30 km or 60 miles of trucks waiting to be unloaded ! That will only get more challenging as we see more rain in May, when rains, loading is delayed. 

-Also, there is no firm quote on the new crushed sugar. We are fully in the second week of April and I don’t have new prices yet and I may have to wait until the end of the month ! It’s fluid.

Imagine when this country will get high quality infrastructure, high-end technology, and use precision agriculture…

What could be the impact of Brazil on the Global Food Markets in 5 years as they build up their trading arsenal ?

In Brazil the Inland transportation costs more than Marine Freight.

The biggest challenge for Brazilian farmers is logistics and  inland transportation, hence a 1 hour truck trip for a 30 MT truck-load  can cost up to 100 BRL/MT (50$/MT) + Diesel cost+ Demurrage Claims. 

It could add another [3 – 4¢] per pound cost on  Brazilian raw sugar spot price that will be split between farmers, millers and traders.

You can charter a vessel to Japan at 46$/Ton, so basically that’s why  Inland Transportation and Logistics will determine the decisions in the Brazilian markets and be the price driver.



It is also said that Brazil, the world’s leading producer, will make more ethanol at the expense of the sweetener just as port congestion threatens to delay exports.

In Brazil, Mills produce both sugar and ethanol and when they have an economic incentive (a favorable Ethanol-Sugar spread).

As ethanol is trending higher; the spread is positive.

In the U.S the biggest the Corn-Ethanol business model doesn’t have the same flex, that’s part of the reason why the U.S maintains a tariff on Brazilian Ethanol.

It appears that millers will use favorably the cheap sugar to produce ethanol, the spread is trending higher (sugar price remains low and ethanol price keep going up), this will give the incentive to reduce their export and produce ethanol. However,  the over-costs related to inland transportation could still add between 3 and  4¢ per sugar pound.

(The biggest challenge for Brazilian farmers/ Millers is logistics and  inland transportation, a 30 MT truck-load  can cost up to 100 BRL/MT (50$/MT) + Demmurage Claims.)

Ultimately, it may sustain raw sugar prices on the world markets.

Impact on the Futures Spreads.

Sugar Demand will drive the Backwardation.

My guess the spread below could go going deeper into backwardation until Mai and then will revert back to a contango structure for Mid-May to September (Harvest)


In a way or other, because of an internal ethanol demand, ports congestion and inland transportation costs and demurrage we can forget about a Sugar surplus in Brazil for 2013 available for exports.

Expect some backwardation in  the Front month Sugar Futures. It is also probable that a semi-arbitrage between sugar and ethanol in Brazil could create some support for world sugar prices as Brazil is leaving his marginal supplier role in the world markets this year. With an increased production of  Ethanol from Brazil in the coming month plus average corn crops in the U.S (and the blending wall), pardon me if i’m wrong,  I just can’t figure out how ethanol couldn’t go lower this summer.

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