The sugar market in NY closed the week at a fall pressured by a weaker real. Take a look at the level July/October and October/March spreads traded at. They closed at 57 and 102 points of discount, respectively. This embeds an overwhelmingly high cost of carry of about 18% per year. The selling pressure – probable pricing done by mills taking advantage of a weaker real – ends up distorting reality. On the part of the industrial consumer, the question each one should ask is, “why will someone pay 18% a year more for sugar in October compared to July, or in March 2016 in relation to October, if the financial and storage cost of my company is much lower than that?” Those are one of the mysteries of the world of commodities.
Due to the devaluation of the real against the American currency over the last weeks, the debt of the sector is now over R$81 billion. And if before it represented 110% of the estimated revenue of the mills for the 2015/2016 crop (without taking into consideration the revenue from cogeneration), today it is almost at 114%. The devaluation of the Brazilian currency only reflects the confidence crisis emanating from the current government. Serious suspicions hovering over the financial market is about the fact Minister Levy might not stay in office long, since being courteous and intelligent, he can’t put up with the rudeness and foul language so often used by his boss. Because Dilma really has difficulty expressing what she thinks (if she can think at all), she would rather surround herself with people with low intelligence levels compatible to hers so she can step on them, using her guerrilla-like and dictatorial behavior. That’s when Mantega is missed. And the dollar rises because of this perception.
The price curve of the sugar traded in NY practically moved entirely in parallel, that is, prices plummeted almost at the same rate from the first to the last trading month on the curve. It is as if the market bet that the worsening of the economic scenario will be around for a long time. Since December, the prices of the sugar futures contract in NY have fallen between 112 and 162 points (between 24 to 36 dollars per ton), with greater pressure (to take advantage of the higher pricing in reais) on the start of the harvest. While real has suffered a 13% fall in the year, sugar has hit a 10% devaluation.
At the end of 2014, May/2015 traded at 14.92 cents per pound with the American currency at 2.6546. This Friday, the dollar closed at 3.0540, which would be equivalent to NY at 2014´s last session price of 12.97. Since the contract for May/2015 closed Friday at 13.44 cents per pound, prices are actually 47 points better than those practiced in late December. The devaluation impacted the drop in prices partially; the difference (positive) is the perception of more constructive fundamentals, which were mentioned here last week.
The price curve in NY converted in reais with structured operations with so-called NDF (non-deliverable forward) shows an average price adjusted to present value of R$972.53 FOB Santos for the 2015/2016 harvest and R$1,045.50 for the 2016/2017 harvest. At least for now, this will keep away an eventual price improvement in NY in cents per pound.
You should understand that low prices in NY don’t mean the mills are losing money. What you should watch closely is the relation in reais per ton. It is that – in most cases – that determines supports and strong resistance on the market under normal conditions. If the real appreciates, so does NY; if the dollar keeps going up, NY will keep falling – it’s as simple as that. Well-capitalized and efficiently managed mills look at these numbers, but those which have a huge liability in dollars might not agree with me. That’s what an executive from the sector told me on last week’s comment, “The problem is that many mills which haven’t fixed NY still owe in dollars and won’t benefit from an eventual devaluation of the real.” That’s true.
The harvest numbers have never been so dispersed, making the decision-making process even more difficult. One of the predictions released last week estimated the 2015/2016 harvest at surprising 620 million tons of sugarcane only for the Center-South. A number of this magnitude would pour a catastrophic additional 2.6 million tons of sugar onto the market – average of the predictions going around out there.
The cost of sugar production, according to the Archer Consulting model, is R$39.3542 per bag at the mill. That value is the same as 13.25 cents per pound FOB Santos.
The ANP (National Agency of Petroleum) has released the consumption volume for January/2015. Gas C (with anhydrous) was 3.86 billion liters while hydrous reached 1.25 billion liters. On yearly bases, the consumption went up 7.81% reaching a total of 57.8 billion liters, of which 33.5 billion liters are gas A (without blend), 13.1 billion liters are hydrous and 11.2 billion liters are anhydrous. Ethanol participation reached 42.1%, the greatest percentage since 2011. If this consumption pattern continues during the next harvest, we will need another 22.7 million tons of sugarcane just to meet this demand. Just keep in mind that over the last twelve months, fuel consumption has grown 4.2 billion liters in absolute values.
Have a nice weekend everybody.
Arnaldo Luiz Corrêa
