The futures sugar market in NY closed the week at a slight high against the previous week. March/2015 closed at 16.54 cents per pound, 10 points above last Friday’s price. The other months had a positive variation up to 20 points in the week. There were a few export businesses while a lot of traders were in London for the Annual Sugar Dinner in that city.
The spreads for the sugar contract in NY are aligned like they have never been before. They show a cash and carry market, coherent with the perception that there isn’t any concern right now over the supply of the product. March/May, May/July, July/October and October/March 2016 are all reflecting a carry of about 10% a year. Calm waters and good opportunities for the capitalized industrial consumers and with storage structure. The spread justifies.
Anhydrous and hydrous ethanol prices are discouraging for the mills for they have plummeted by no less than 15% in dollars this month making the financial return even worse. On the other hand, the lower prices at the pump might drive consumption of the product up and maybe change the consumer’s habit of resisting going back to consuming ethanol when the parity stays over 70% for a long period of time. With a possible ICMS tax decrease from 19% to 15% on ethanol in the state of Minas Gerais, whose project is being discussed at the Legislative Assembly and should be voted on this month, there might be a meaningful increase in consumption on the second largest consumer market of the country. Start sharpening pencils.
A better scenario for next year shows an increasing consensus among market analysts that the sugarcane harvest in Center South will end sooner this year and many companies are beginning to work with the maximum number of crushing of 545 million tons. This volume, if confirmed, represents an 8.71% fall against the 2013/2014 harvest. And how about next year – which is the possible volume? The most optimistic people indicate a 35-million-ton increase, that is, 580 million tons. You know what that means, right?
We should have an additional consumption of 1.1 billion liters of ethanol due to the change in the blend from 25% to 27.5% in addition to a possible increase in ethanol consumption in the state of Minas Gerais.
On the other hand, a stronger dollar against the real inhibits a high in NY. I believe there will be some psychological resistance at R$1,000.00 per FOB ton, leading lots of companies to think about their hedges from May/2015 on for the 2015/2016 harvest.
If Dilma gets reelected, the market mood will go sour, the lack of transparency and credibility of the government will drive away investments and the dollar might reach, according to some economists, R$2.5500. If Aécio gets the presidential sash, it is believed that there will be an efficiency shock with Arminio Fraga taking charge of the economy and the dollar revisiting R$2.2000. This time around, the resistance aforementioned would turn into 17 cents per pound as a limit to the foreign market (May-based) under Dilma and almost 20 cents per pound under Aécio.
Dollar at 2.5500 places gas price lag on the foreign market against the pump price at over 8%. With the dollar at 2.200, the lag dwindles to 5%.
The sector’s mood has greatly improved due to Aécio’s spectacular performance. The polls were way off and didn’t capture the voter’s wish for change. It was a great methodology mistake. However, Aécio’s winning the election isn’t in the bag yet.
Assuming that the PSDB (Brazilian Social Democracy Party) candidate gets 80% of the votes given to Marina in the states where he got more votes than Dilma, and also assuming that in the states where Dilma got more votes than him, Aécio gets at least 40%, it will be necessary that at least 6% of those who voted for Dilma change their votes. Our only hope for Aécio to make it to the presidency is if 15% of the voters who say they might change from one candidate to the other really do it.
Have a nice weekend.
Arnaldo Luiz Corrêa
