Brazil's Sugar Dilemma: Bullish Signals in a Sea of Surpluses

The global sugar market finds itself at a crossroads. Brazil's revised production forecasts, India's monsoon-dependent surplus, and conflicting projections from key institutions like the USDA and ISO have created a volatile landscape. While traders focus on record output numbers, a deeper look reveals structural imbalances that could spark a price rebound. For investors, the question is clear: are sugar futures underpriced, offering a rare long opportunity amid perceived oversupply?

Brazil's Production Cuts: A Mixed Bag of Challenges

Brazil's 2024/25 sugar output fell to 44.12 million metric tons (MMT), a 3.4% year-over-year decline, as droughts and frosts slashed yields in the Center-South region. The USDA projects a rebound to 45.87 MMT in 2025/26, but this assumes ideal conditions. However, logistical hurdles—such as ethanol prioritization (up 3.3% in 2024/25) and winter frost risks—threaten to disrupt this recovery.

The key metric to watch is Total Recoverable Sugar (ATR), which Hedgepoint revised downward to 139.8 kg/t, reflecting crop stress from prior heatwaves. This means even with higher cane volumes, Brazil's mills may struggle to meet the USDA's bullish targets.

India's Monsoon: A Sword of Damocles Over Supply

India's 2025/26 sugar output is projected to surge by 25% to 35.3 MMT, but this hinges on monsoon rains. A dry spell in key regions like Karnataka could derail this outlook, as sugarcane requires consistent moisture. Historical data shows that even a 10% rainfall deficit can cut yields by 15% or more.

The ISO's global deficit of -5.47 MMT in 2024/25 underscores the fragility of supply chains. If India's surplus fails to materialize due to weather, the deficit could deepen, creating upward price pressure.

Conflicting Forecasts: A Recipe for Volatility

The USDA and ISO disagree sharply on the future of sugar markets. The USDA sees a 2025/26 surplus of 2.8 MMT, while the ISO warns of lingering deficits due to Brazil's logistical bottlenecks and India's climate risks. This divergence creates a sweet spot for traders:

1. Short-term bearishness: Current prices reflect surplus fears, with NY Sugar #11 hovering near 2024 lows of $18.50/lb.
2. Long-term bullish risks: Supply-side shocks (e.g., Brazil's ethanol shift, India's monsoon) could tighten markets faster than anticipated.

The Investment Case: Long Sugar Futures, but with Caution

The data points to an underpriced market for sugar futures. Here's why investors should consider a strategic long position:

• Valuation: Sugar is trading at a 20% discount to its 5-year average real price, despite structural risks like Brazil's yield declines.
• Supply-side asymmetry: The cost of production (Brazil's $0.10/lb vs. India's $0.08/lb) creates a floor, while demand for sugar in beverages and food remains sticky.
• Event risks: The delayed Brazil E30 ethanol mandate (now August 2025) and India's monsoon outcomes could trigger rapid price swings.

Recommendation:
- Buy NY Sugar #11 futures with expiration dates in Q4 2025 or Q1 2026 to capitalize on deficit fears and weather-driven volatility.
- Set stop-losses at $17.50/lb to protect against further surplus-driven declines.
- Monitor: Brazil's ATR metrics, India's rainfall data, and ethanol allocation shifts in real time.

Risks and Considerations

• Global demand: Weakness in China's import demand or a stronger US dollar could cap gains.
• Policy changes: Brazil's CBios carbon credit program might incentivize more cane-to-ethanol shifts, worsening sugar supply.

Conclusion: Betting on the Unseen

The sugar market is a study in contradictions: abundant headlines about surpluses mask deeper vulnerabilities. Brazil's production cuts, India's climate gamble, and the ISO's deficit warnings create a scenario where prices could rebound sharply. For investors willing to bet on the unseen risks, sugar futures offer a compelling asymmetric opportunity—one where the downside is limited by production costs, but the upside is amplified by supply-side uncertainties.

Final Note: Diversify exposure by pairing sugar futures with long positions in ethanol ETFs (e.g., PBE) to hedge against Brazil's shifting production priorities.

Data sources: UNICA, Hedgepoint, USDA, ISO.