El Niño threatens global sugar supply while supporting ethanol prices.
A stronger El Niño from October 2026 through January 2027 is increasing risks to global sugar production, tightening the supply balance and supporting ethanol prices amid reduced sugarcane availability and structural demand.
The sugar and ethanol markets enter September 2026 facing an important shift in the nature of climate-related fundamentals. El Niño, previously viewed primarily as a potential risk to upcoming crops, is now showing signs of becoming a stronger and longer-lasting event, with direct implications for sugarcane and sugar beet supplies across major producing regions.
September climate monitoring indicates a probability of slightly more than 80% that El Niño will persist through May 2027, while Pacific surface temperatures moved from a positive anomaly of 4.3°F in July to 6.3°F in August.
At the same time, deeper Pacific waters are showing temperature anomalies of approximately 14.4°F to 18°F at depths of about 82 feet. A month earlier, those warmer temperatures were located at depths closer to 164 feet.
Current projections indicate that El Niño could peak between October 2026 and January 2027, precisely as the new international sugar season begins to take shape.
Global Sugar Supply Faces Growing Pressure
For the sugar market, the main consequence of this climate pattern is the possibility that the 2026/27 international season could begin with reduced supply, just when physical availability would normally be expected to recover.
The season beginning in October is likely to find several major producing regions under the influence of a potentially stronger climate event, limiting the ability of countries already showing signs of crop losses to recover production.
This is particularly significant because supply problems are no longer concentrated in a single origin. The European Union, India, Thailand, China and Brazil are facing varying degrees of production risk, creating a situation in which the international market has less ability to offset losses in one region with increased output elsewhere.
European Sugar Production Is Already Declining
In the European Union, this process is already showing signs of materializing.
The latest estimates used in market reports point to a 19% reduction in 2026/27 supply, with production declining from approximately 18.24 million short tons to 14.77 million short tons.
The sequence of revisions also deserves attention because it shows that expected losses have increased as new climate data have been incorporated.
The European Commission had previously projected a smaller reduction, while subsequent estimates from the European Union Sugar Market Observatory indicated a more significant decline.
Tereos' projection of one of the smallest sugar beet crops in decades, accompanied by a sharp decline in yields, reinforces the view that weather problems are already having tangible effects on supply.
India Is Becoming a Sugar Buyer
India represents another major source of fundamental pressure.
Reduced monsoon rainfall, combined with expectations for lower sugarcane yields, has been accompanied by government measures designed to increase domestic sugar availability.
SAFRAS & Mercado estimates a 4.19-million-short-ton decline in Indian production, taking supply from approximately 37.04 million to 32.85 million short tons, in a market where domestic demand remains close to 32 million to 33 million short tons.
The need for imports becomes even more significant under this scenario.
The government authorized imports of up to approximately 1.10 million short tons of sugar through October, and the industry had already contracted roughly 882,000 short tons of that quota.
This is an important sign of tightening conditions because India is not only producing less sugar; it is also competing for sugar on the international market to rebuild domestic availability.
India's behavior also illustrates how inventories are becoming increasingly important in price formation.
Domestic inventories are expected to decline from approximately 6.61 million to 3.86 million short tons by the end of the 2025/26 season, reducing the country's ability to absorb additional supply shocks.
The need to bring forward crushing operations for the new season and increase sugar availability in October reinforces expectations that India's next crop could begin with considerably less flexibility.
Imports, therefore, should not be interpreted simply as another source of global demand. They are also evidence that one of the world's major sugar producers is struggling to balance its domestic market.
Thailand and China Add to Asian Supply Losses
Thailand and China complete the deteriorating Asian supply picture.
Market estimates point to a decline of approximately 2.20 million short tons in Thai sugar production and nearly 992,000 short tons in Chinese production.
Combined with India, potential production losses across these three Asian countries exceed 7.38 million short tons.
When expected reductions in Europe and Brazil are included, the market faces a potential supply decline exceeding 13.2 million short tons among major global producers.
It is precisely this simultaneous deterioration across multiple origins that changes the market outlook.
The issue is no longer simply a weather concern affecting one country. Supply is deteriorating across several producing regions at the same time, while the International Sugar Organization has already revised the global balance from a surplus of approximately 1.21 million short tons to a deficit of roughly 220,000 short tons.
The shift from surplus to deficit is one of the most important signals for market expectations because it reduces the global supply cushion and increases the importance of remaining inventories.
Brazil: More Sugarcane Does Not Necessarily Mean More Sugar
In Brazil, the situation needs to be interpreted differently.
The Center-South region still has more sugarcane available than during the previous season, but that does not automatically translate into higher sugar production.
Conab's second estimate for 2026/27 projected sugarcane crushing at approximately 711.8 million short tons, up 4.78% from the previous season, while sugar production was estimated at approximately 43.55 million short tons, down 3.12% year over year.
The divergence between those two trends is critical to understanding the market: there is more cane, but not necessarily more sugar, because the allocation of Total Recoverable Sugars (TRS) toward ethanol production continues to have a significant influence on the industrial production mix.
Brazilian weather conditions are also becoming increasingly important just as the Center-South harvest moves into its later stages.
Forecasts for increased rainfall over sugarcane areas in September are expected to slow crushing activity, which is already declining for seasonal reasons.
If this rainfall pattern intensifies during the second half of the year, the impact could extend beyond a temporary slowdown in crushing.
The risk would then include an early end to the season, a larger volume of unharvested cane carried into the following crop and reduced feedstock availability for both sugar and ethanol production.
SAFRAS & Mercado expects carryover cane to reach approximately 11.02 million short tons, compared with just 1.10 million short tons in the previous season.
El Niño Is Also Shaping the 2027/28 Crop Outlook
At this point, El Niño becomes directly linked to the transition into the 2027/28 season.
SAFRAS & Mercado expects the phenomenon to reach its greatest intensity between October and January, increasing the importance of weather conditions precisely when expectations for the next crop are being formed.
As a result, the market will be watching not only how much sugar is produced in 2026/27, but also how much available sugarcane can actually be processed before the season ends and under what conditions the following crop begins.
For sugar, this environment keeps supply fundamentals as the primary source of market support.
The market has already demonstrated an ability to absorb profit-taking without losing the 19 cents/lb area for March 2027, suggesting that price support is not dependent solely on fund activity.
An increase in speculative long positions may amplify the move, but the fundamental cause remains the deterioration of the global supply balance.
As production and climate data are revised, the market is increasingly pricing in lower physical availability, while funds become more willing to expand long positions.
19 Cents per Pound Is Becoming a Key Support Area
The result is an important change in the interpretation of the price curve.
The 19 cents/lb level for March 2027 is no longer being viewed merely as a psychological resistance level. It is increasingly taking on the characteristics of a fundamentally supported price zone.
From there, the combination of a global deficit, lower production in Asia and Europe, reduced Brazilian sugar output, Indian imports and an extended El Niño creates room for higher prices toward the end of 2026 and into the first half of 2027.
Price support, therefore, is becoming less dependent on any single factor and increasingly tied to the convergence of several bullish fundamentals.
Ethanol Is Feeling the Same Supply Pressure
In the ethanol market, the same climate environment is producing a different but equally important effect.
Slower crushing activity in Brazil's Center-South limits physical availability precisely when fuel distributors need to rebuild inventories.
This becomes particularly important following July retail sales of approximately 502 million gallons, according to data reported by Brazil's ANP at the end of August, in a market with gasoline demand of approximately 1.06 billion gallons and the new 32% anhydrous ethanol blend, or E32.
In recent weeks, buyers have remained relatively cautious, with transactions focused primarily on immediate needs.
However, the combination of lower inventories, competitive hydrous ethanol prices and a seasonal reduction in supply is likely to limit the downside for prices.
In addition, Petrobras' gasoline price increase led physical-market asking prices in Brazil's Center-South to rise by approximately 7% to 8% in a single day.
Structural Ethanol Demand Adds Another Layer of Support
The competitiveness of hydrous ethanol relative to gasoline remains one of the main factors supporting demand.
Despite some recent deterioration caused by higher ethanol prices, ethanol has remained competitive in eleven Brazilian states for several consecutive weeks.
At the same time, the structural expansion of anhydrous ethanol demand associated with E32 adds another layer of demand for sugarcane.
A larger share of anhydrous ethanol in gasoline increases biofuel production requirements and consequently reduces the amount of TRS that could otherwise be directed toward sugar production.
This point is particularly important because sugar currently carries an arbitrage premium over ethanol.
Recent data show hydrous ethanol as significantly less attractive than raw sugar traded in New York and also less competitive than crystal sugar in Brazil's physical market.
That tends to encourage mills to favor sugar production when arbitrage conditions allow it, but it does not eliminate support for ethanol.
On the contrary, when sugar prices rise, the opportunity cost of using TRS for ethanol also increases, meaning mills require higher ethanol prices before making additional volumes available.
Oil Above $107 per Barrel Adds Support
Oil remains another complementary market factor.
With Brent crude trading above $107 per barrel, the relationship between fossil fuels and biofuels becomes increasingly important.
Higher crude oil prices improve the relative economics of biofuels, support ethanol competitiveness and can simultaneously increase the willingness of investment funds to build long positions in sugar.
However, oil should be viewed as an accelerator rather than the primary fundamental driver.
The main driver remains the physical availability of sugar and sugarcane feedstock.
Weather Is Becoming the Market's Main Driver
The central question for the coming months will be how quickly climate projections translate into actual production numbers.
SAFRAS & Mercado sees a stronger El Niño, with significant surface warming, substantial temperature anomalies below the surface and a high probability that the event will persist through May 2027.
For the market, this means weather is likely to dominate expectations during the most important period for determining international supply.
Price corrections remain possible and even natural in this environment, particularly as funds take profits and the market responds to movements in the U.S. dollar and crude oil.
However, a short-term correction should not necessarily be interpreted as a structural change in trend as long as the underlying fundamentals remain tight.
The market's ability to hold the 19 cents/lb area for March 2027 despite profit-taking is one indication of this dynamic.
Global Sugar Availability Continues to Tighten
September's climate update reinforces expectations for lower global sugar availability and increasing pressure on the 2026/27 balance.
What has changed from previous months is that El Niño is no longer simply a future risk. It is now combining with estimated production losses in Europe, India, Thailand, China and Brazil.
The possibility that the event could persist through May 2027 further increases the importance of weather in shaping the 2027/28 supply outlook.
For sugar, the environment remains structurally supportive of prices as long as there is no evidence of a significant recovery in supply.
The combination of a global deficit, tighter inventories, India's import requirements, lower Asian and European production and growing risks in Brazil's Center-South creates a market structure capable of supporting elevated prices during the second half of 2026 and through the first half of 2027.
Against this backdrop, the 19-23 cents/lb range becomes increasingly important as a support zone, while 20 cents/lb appears increasingly plausible as part of the market's repricing process in September.
From there, confirmation of production losses in Asia, Europe and Brazil, combined with the evolution of El Niño during the final quarter of 2026, will determine whether prices move to still higher levels during 2027.
In summary, the market is no longer pricing only the possibility of a strong El Niño. It is beginning to price the consequences of a prolonged El Niño for global sugar supply, Brazilian sugarcane availability and the economic relationship between sugar and ethanol.
That shift is what makes weather the central driver of market expectations for the months ahead.
Thailand Adds Another Warning Sign
Adding to this scenario, toward the end of the second week of August, Thailand's Office of the Cane and Sugar Board, a government-linked agency, estimated that the country's sugarcane crop could decline 9.52%, from approximately 115.7 million short tons to 104.7 million short tons, between the current 2025/26 international season and 2026/27.
As a result, the country's sugar supply would fall 12.5%, from approximately 13.23 million short tons to 11.57 million short tons.
In May, the USDA had projected Thailand's 2026/27 sugar production at approximately 10.47 million short tons, about 2.76 million short tons below the Thai government's estimate.
However, SAFRAS & Mercado had already projected in June that adverse crop impacts could reduce the country's sugar output to approximately 8.27 million short tons, 21% below the USDA figures available at that time.
In our view, the Thai government's figures, which still place production at approximately 11.57 million short tons even after a downward adjustment, appear clearly overstated due to domestic concerns about inflation.
Maurício Muruci
Market Intelligence Specialist - Sugar & Ethanol
SAFRAS & Mercado
Editor's note: This article was originally written in Portuguese. AgroLatam's editorial team translated and adapted it into English for U.S. readers, including the conversion of metric measurements into U.S. customary units, while preserving the author's original analysis, data and opinions.
