Fund Short Covering Lifts Sugar Prices on a Decline in Brazil's Sugar Output

Sugar prices are rising for a second day, driven by fund short-covering after UNICA reported a -6.8% y/y decrease in Brazil's Center-South sugar production for the first half of May and a -22.7% y/y cumulative decrease through mid-May. This counteracts recent pressure on sugar prices from expectations of a global surplus, as the USDA projects a +4.7% y/y increase in global 2025/26 sugar production, potentially leading to a surplus of 41.188 MMT; however, the ISO recently raised its 2024/25 global sugar deficit forecast, indicating mixed signals in the market.

Analysis

Sugar prices are witnessing a short-covering rally for a second day, with July NY world sugar #11 (SBN25) up +0.76% and August London ICE white sugar #5 (SWQ25) up +0.84%. This movement is attributed to carryover from Unica's report on Thursday, which indicated Brazil's 2025/26 Center-South sugar production for the first half of May fell 6.8% year-over-year (y/y) to 2.408 MMT, and cumulative 2025/26 output through mid-May was down 22.7% y/y to 3.989 MMT. This current production concern in Brazil provides a temporary lift after prices hit multi-year lows (NY sugar at a 3-3/4 year low, London at a 4-1/4 month low) over the past two months, driven by expectations of a significant global surplus. The USDA's biannual report projects global 2025/26 sugar production to increase by 4.7% y/y to a record 189.318 MMT, resulting in a global sugar surplus of 41.188 MMT, up 7.5% y/y. This USDA forecast includes Brazil's 2025/26 production rising 2.3% y/y to a record 44.7 MMT and India's 2025/26 production climbing 25% y/y to 35.3 MMT, contingent on favorable monsoons. However, conflicting data for the 2024/25 season suggests a tighter immediate market: the International Sugar Organization (ISO) raised its 2024/25 global sugar deficit forecast to a 9-year high of -5.47 MMT and cut its 2024/25 global production forecast to 174.8 MMT. Further supporting near-term tightness, India's ISMA projects 2024/25 sugar production to fall 17.5% y/y to 26.2 MMT, with current season output (Oct 1-May 15) down 17%. Conab also projected Brazil's 2024/25 sugar production to fall 3.4% y/y to 44.118 MMT due to drought and heat. The market is thus navigating divergent outlooks—emerging weakness in current Brazilian early harvest figures and a tighter 2024/25 global balance versus a projected substantial 2025/26 surplus.

Key Decisions for Investors

• Investors should closely monitor upcoming production data from Brazil (Unica, Conab) and India (ISMA), alongside global supply/demand updates from the USDA and ISO, to assess the evolving balance between the current 2024/25 season's tightness and the projected 2025/26 surplus.
• Given the recent short-covering rally following significant price declines to multi-year lows, and amidst highly conflicting fundamental signals, it is prudent to exercise caution and anticipate potential for continued price volatility as the market digests these divergent forecasts.
• Particular attention should be paid to weather developments, notably the actual performance of India's monsoon season compared to forecasts, as this will be a critical factor in validating or challenging the USDA's optimistic production outlook for the 2025/26 season.
• Consider strategies that differentiate between the near-term outlook, where the 2024/25 deficit may offer price support, and the longer-term perspective, which faces potential headwinds from the anticipated 2025/26 surplus.