The futures sugar market in NY closed the week at a slight low for October/2014, which closed Friday at a 15-point drop against the previous week. March/2015 had a small negative variation of 7 points only (1.50 dollar per ton) and the other months all closed at a slight high.
The question that has everybody wondering is whether the time to buy sugar in NY has come. That is, have prices hit bottom? Well, on August 19, we saw the lowest price in reais per ton since June 13, 2013 – 798.98 reais per ton. The lowest price over the last 3 years occurred on May 11, 2011 when NY was trading at 20.94 cents per pound and the dollar was at 1.6203. That is why it is important to look into the trajectory of the prices in reais in order to have an idea of how much pressure the market has been under. The fact is that we are at a very low level even when we take into account some things that might significantly change the direction which the sugar market will take.
PT – the Worker’s Party – has never been so close to losing an election, and Petrobras shares are on the increase because of this possibility. With the change in government, it is just natural that the bleeding in the cash flow of the state-run oil company will be stopped. In order for that to happen, gas price alignment with the foreign market should occur. Adjusted prices enhance ethanol competitiveness. More sugarcane should be diverted towards ethanol production at the beginning of the next harvest. And to corroborate this argument of better prices, it is most probable that sugarcane production growth for 2015/2016 won’t be enough for sugar demand on the foreign market and for ethanol on the internal market, considering an increase of about 1.1 billion liters in consumption with the change in the mix going from 25% to 27.5%.
If we are to draw up a strategy to take advantage of an exponential high the sugar market might have due to what has been set forth in the previous paragraph, it is advisable to do so by using options and some stop levels to avoid disagreeable surprises. Remember that the dollar factor can still be determinant should the political and economical scenarios get worse.
As far as sugar is concerned, the market expectation is that Thailand will deliver at least 650,000 tons of sugar against the NY contract for October, which expires on September 30. We have heard about higher numbers than this, close to 2 million tons. It was this perspective which made the spread for October/March trade at 200 points. This means that whoever was long for October/2014 at the stock exchange thought it better to roll the position over (short for October and long for March) because they do not believe the physical market will improve and, therefore, it is better to avoid making a fool of themselves. It also goes to show a weak demand and a preference to hold off on purchasing now in the hope that the market will get better. In addition, because Thailand is going through a recession with its GDP shrinking more than 8%, it is but natural that there is pressure to sell commodities.
Over here, we are technically already in recession. The Brazilian GDP shrank 0.6% in the second quarter of the year against the previous quarter. As noted by MB Associates, “Dilma’s government keeps delivering results that are more pessimistic than those of the most pessimistic analysts”. It goes on, “With so many quarters on the decrease, it is hard to say that recession is in the last semester only. In a way, it dates back into the past and it would be possible to say that the country remains in a recessive trait.
In the accumulated of the year, commodities show a weak performance. Soy, cotton and corn have accumulated 14% and 22% falls. Sugar still has a 6% fall. Coffee is in the spotlight with gains over 80% in the accumulated of the year.
There are still hovering doubts about what kind of relationship Marina Silva will have with the sugar-alcohol sector. A weaker resistance to an eventual PSB government can be seen. A renowned mill owner from Sao Paulo found “her opinions about the sector to be positive”.
She came across as being knowledgeable and realistic about ethanol and bioelectricity and recognized their importance. Another mill owner commented that “this won’t be an election to get someone elected, but to pull someone out of the way of the country’s progress”. An experience ethanol trader commented that Eduardo Gianetti da Fonseca would have a program of fiscal incentives for the hydrous and for freeing gas price. I have never thought I would live to see this. Will it be possible?
Archer has started registrations for the 22nd Intensive Course on Futures, Options and Derivatives, which will be held on September 23, 24 and 25 in São Paulo. For further information, log on to our site www.archerconsulting.com.br
Have a nice weekend.
Arnaldo Luiz Corrêa
