The sugar foreign market has had a slight recovery this week. March/2015 reached a little over 15 cents per pound, an 11-dollar-per-ton improvement compared to the previous Friday’s closing. Nevertheless, businesses and moods are still at a low. Next week will be even more discouraging due to Carnival in Brazil and the holiday in the USA. The bears have been so hung up on their convictions the market will keep falling that 2/3 of the readers who responded to our survey last week about where they would place their wagers – if 12 cents per pound or 18 cents per pound – on a compulsory targeted bet of US$1 million believe in a 12-cent-per-pound market!
By the end of 2014, with NY sugar contract closing at 14.61 cents per pound and the dollar at 2.6546 reais, the FOB ton value for sugar was 890 reais. With this Friday’s closing, the value of the ton rose to R$971, a 9% premium above the exchange rate devaluation, which was 6.5%. A market trader has said that even with the currency devaluation, sugar had to recover competitiveness vis-à-vis ethanol appreciation. “A matter of arbitrage”, said the trader.
The National Agency of Petroleum (ANP) has released the sales total for fuel in 2014. The country consumed 57.4 billion liters – a 7.85% increase in relation to the same period last year. In absolute values, the consumption increased 4.175 billion liters last year, of which 1.594 billion were gas A (before blend) and 2.581 billion were ethanol (anhydrous and hydrous). It is an amazing number what with the economic situation. This is the issue I would like to point out here. Even with a recession this year, estimated by highly respected economists to be around a 1.5% fall in GDP, the sales rate of light vehicles will go on to a minor extent, but the fleet will keep on increasing. In our last weekly comment we said that the growth of ethanol consumption for this year would be 4.3 billion liters. Based on the consolidated figures by the ANP in 2014, we can see that is totally feasible. I will explain: consumption is supposed to increase when we change the percentage of the blend from the current 25% to 27% and the state of Minas Gerais, the second largest consumer, should increase ethanol consumption due to the tax reduction in that state, fostering more competitiveness for ethanol. In terms of sugar ton, this consumption will bring us to roughly 50 million tons over what is needed for the 2015/2016 harvest.
The 1st Archer Estimate for the 2015/2016 harvest in the Center-South is 573.7 million tons with a 32.2-million-ton sugar production and 26.3 billion liters of ethanol divided between 10.9 billion liters of anhydrous and 15.4 billion liters of hydrous. In a simulation between the sugar mix (from 43% to 45%) and the crush volume (between 570 and 590 million tons), the maximum production of sugar would be 34.7 million tons and the minimum production would be 32 million tons. Due to this insignificant increase, we will surely have sugar volatility. Without enough sugar to meet the additional demand, the only way out – if arbitrage pays off – is to produce more ethanol and less sugar.
While the Brazilian real has devalued by 15% to the dollar over the last twelve months, the Indian currency has taken a different path and appreciated 2% over the same period. Today, in order to make the same amount of reais he used to a year ago, the sugar producer can sell his product with a 15%-discount in dollars. Now, in order to make the same amount of rupees he used to a year ago, the Indian producer needs to sell his product with a 2%-increase in dollars. There is no doubt as to who suffers the most with the sugar market fall. No wonder the subsidy issue comes up in that country. The estimated value of the subsidy is US$11.20 per ton, about 3-4% of the value of sugar on the foreign market. Curiously, the Prime Minister Narendra Modi came out against any subsidy in his campaign.
In his dream world, a BNDES director has stated in an interview for “Valor Econômico” newspaper that “in 2015, the mills will have one of the best years they have ever had”. At the same time, the rating agencies, such as S&P and Fitch, understand that the year will extremely difficult for the mills despite CIDE’s return. Archer’s estimate is that the debt of the sector this week is at R$76.7 billion against an estimated revenue for 2015/2016 of R$73.5 billion.
According to several historians, Hermes da Fonseca has been the most mediocre of all the Brazilian presidents since the proclamation of the Republic in 1889. In a direct election in 1910, after a fiery campaign, supported by the military in a coalition between “gauchos” and “mineiros”, he went up against and defeated Rui Barbosa, who had the support of “paulistas” and “baianos”, by a 400,000 vote difference (it is said there was fraud). His election represented the return of the military to power, after four civil presidents, in order to restore what they used to call “the republican ideals”. Hermes was the opposition candidate up until the then President Afonso Pena’s death, who supported another candidate. Vice-president Nilo Peçanha took office and started supporting Hermes. His government faced riots and strikes the morning right after his inauguration, and these were fought against with a heavy dose of repression and arbitrariness, politically weakening him to the point where, two years into his presidency, he was unanimously considered “a good-for-nothing”. It took a little less than one hundred years for Hermes to be finally surpassed “with flying colors” when it comes to mediocrity, incompetence, arrogance and cockiness.
Archer is pleased to announce its partnership signed with Mark 2 Market. We now offer a new In-Company Course, which combines Archer’s expertise on the agricultural market and Mark 2 Market’s excellence in accounting aspects and Hedge Accounting, one of the biggest demands on the part of audits, controllers and risk managers of the agribusiness companies. For more information contact priscilla@archerconsulting.
Nice Carnival everyone!
Arnaldo Luiz Corrêa
