The sugar market in NY closed the week practically unchanged. March/2015 went up just 8 points (less than two dollars per ton) closing the week at 16.62 cents per pound while the other maturities didn’t even reach a two-digit positive variation. The physical market shows all its weakness by trading over the week that just closed 50 thousand tons of VHP for October delivery with a huge 125-point discount off of March. That is, sugar being sold practically at production cost.
Sugar isn’t doing well, but ethanol is doing a lot worse. I will explain – the futures Brent-type oil market for immediate delivery has accumulated a 19.5% fall over the quarter and was trading at US$84.50 a barrel last Friday. So, for the first time in a long while, the fair gas price per liter in Brazil coincides with the price at the pump, that is, about R$2,835. There is no lag anymore now – that is water under the bridge. Petrobras cash bleeding as a result of, among other things, this perverse policy headed by ex-minister-in-office Guido Mantega, has finally been stopped.
The sector, which thought there would be fuel price adjusting so that ethanol could be competitive, again, will have to live with present levels, which do not pay the mills. Hydrous today is sold at a 5.5% average loss against production cost, without taking into account the financial cost.
Lower oil price means that ethanol needs to be cheaper so as not to lose market share; paying poorly means more sugarcane will be transferred to the sugar in the mix next year, which translates into more sugar supply on the market, which means lower prices. It is a perverse cycle which inflicts only the difficulties to the sector without its having taking advantage of the fat years because gas price is frozen.
The decision-making process for the companies is at a crossroads victim of the political uncertainty we will find ourselves in until our country picks its next president. If Aécio Neves makes it to the presidency, rumor has it that those who would be part of his team bring comfort and hope for qualitative changes in fostering policy implementation for the sugar-alcohol sector. Dilma’s staying on as president would be a disaster since her government has already proven incompetent and is crawling with good-for-nothing people who have no government plan – just a project for perpetual power.
To be on the safe side, if we assume PT will leave the government, the market feels we will see a large foreign investment inflow, which should pressure the dollar rate. It would be wise for the mills to look closely at the NY quotation converted into reais per ton. Over the last two years, it has been R$872 per ton on average, reaching R$1,000 per ton tops. With the dollar having timely sudden and fast highs, we have to take advantage of the moments when an eventual fixing of FOB sale represents these values.
Nevertheless, the sugar market in NY might also go up – not necessarily on this dollar. Some basic strategies using options and taking advantage of the low traded volatility can capture these situations should we have an appreciation of prices due to the fundamentalist scenario shaping up for the near future: a) a 2015/2016 harvest which at best would reach 550-600 million tons of sugarcane in the Center South; b) the first world sugar deficit in 3-4 years which, according to a European bank, can come to 3.5 million tons; c) smallest renewal of sugarcane fields over the last years due to lack of investment; d) anhydrous blend increase in gas from 25% to 27.5% causing a 1.1 billion-liter rise in consumption.
The red flag (without any political connotation) which flutters in this case is, as we said above, a sharp fall of oil on the foreign market, which changes this equation bringing about a vigorous change in the production mix.
I believe we will have a much more sensible and attentive market to the arbitration between sugar and ethanol. Never have the options been such important tools under an indefinite scenario like the one we are facing. We’d better be cautious, just in case.
Have a nice weekend.
Arnaldo Luiz Corrêa
