The futures sugar market in NY closed the week with October/2014, which expires next Tuesday, up almost 200 points, 42 dollars per ton to be more accurate. This has been the largest weekly variation since October 2011 in absolute values and the largest in relative values since October 2010. I wonder if October will be the turning point for the sugar-alcohol sector.
The other prices also went up, but not as strongly. But they showed an appreciation between 6 and 16 dollars per ton. The October/March spread which has once been traded at incredible 264 points closed the week at 115 points. By the way, it was the strengthening of the spread that influenced the spectacular market increase.
But, after all, what has spectacularly moved the market almost 200 points? Remember that low-quality Thai sugar nobody wanted? Well, it seems like buyers eventually changed their minds about it. There was a significant increase in demand for this sugar, which was sure to be delivered to the exchange at the expiration next week. It had been estimated that 750 thousand to 1 million tons could be delivered at the exchange. Rumor has it that over 400,000 tons have been traded and that, at the end of the day, delivery might not be so dramatic. That is, the low-quality sugar seems to have found its place under the sun. After all, money does not take insult and the discounts were really appealing. Is it possible that the fear the market had of March repeating the trajectory of October has dissipated?
How about the funds at this point? They were short at a little over 100,000 contracts until last Tuesday. After that, the market went up another 130-150 points. How much higher can the market go if they decide to buy their short positions back?
A very important point that should turn on a yellow light on the market is the cost of production not only in Brazil but also in competing countries. These are, for the most part, costs way over the prices that have been practiced at the NY exchange. That is, who can afford to produce in the red for a long time? Sugar production cost in the Center-South, according to the Archer Consulting model, is 15.85 cents per pound Santos FOB, without financial cost. Australia and Thailand have a production cost up to one cent per pound over Brazil, while India and the UE are over 20-21 cents per pound. That is, it is rare to see a market which can bear a loss for over a long period of time when it comes to commodities.
Anhydrous ethanol is still the best financial return for the mills, carrying an almost 3% return on the production cost, without taking into account the financial cost. What has saved (?) the year from an even more painful loss was that the export fixations at the mills showed an equivalent value in reais per ton above the cost of production. An average fixation of 17.58 cents per pound equivalent to R$921.95 per ton is not all that bad.
The lessons to be taken away from this early panic that happened when the market plunged into the lows is that the spread, be it with futures, be it with options, be it with structured operations, effectively mitigates the risks, is essential to the everyday running of the company and should not be underestimated. However, lots of companies have complained about the over-the-counter operations whose pricing relied on certain market levels and which ended up not happening. That is, placing a high percentage of the fixing volume on this kind of structure might be too bold. An over-the-counter operation must be used when the company fully knows the effects of the chosen structure on its price-earnings ratio.
I would like to correct the number we published here last week (thanks to an attentive London reader). From January to August this year, Brazil exported 14.9 million tons of sugar against 17.4 million shipped over the same period last year, that is, a 2.5-million-ton fall and not 4.2 million as we had reported.
Dilma Roussef, the President of Brazil and a stunt philosopher in her free time, on her firm trajectory to embarrass good Brazilians all over the world, spoke at the UN deeply regretting the United States and its Arab allies’ attack on the Syrian terrorist group that kills, rapes and beheads people. Dilma believes that the best way to address these issues is through dialogue. Dilma’s sympathy towards terrorists is curious. As if the fact that the Brazilian diplomacy licks the boots of terrorists Fidel Castro and the deceased Hugo Chavez was not enough, now this. Dilma herself should try to work out this issue with this Syrian group. Who knows? It just might work.
Demarest Advogados, with the support of Archer Consulting, will hold the Seminar on Sugar-energy Sector: Scenario, Access to Markets, Mergers and Acquisitions next October 2, from 1:30 pm to 6:30 pm. There are limited vacancies. For further information, please send an email to eventos@demarst.com.br
Have a nice weekend.
Arnaldo Luiz Corrêa
