The sugar market in NY closed the week practically unchanged for the first two trading months – May and July 2015 – at a slight high in the following months until October 2016 when a slight fall has been seen. These are currency-related adjustments, according to a market trader, whose upward value along the exchange curve (via NDF) puts pressure on the sugar values in NY. For the record, the traded values as of March 2016, if hedged appropriately by using financial tools available on the market, show fixing values over R$1.050 per FOB ton built into present value discounting the Brazilian interest rates. Those who are structured to operate this way are setting very attractive prices. This will continue pressuring NY if the real keeps devaluing.
The dollar has appreciated in relation to other currencies, directly affecting the price of commodities on the foreign market. The impact of this devaluation has favored some countries which have seen the production cost of their raw material drop in dollars and therefore creating competitive advantages for some of them. In the specific case of the sugar, we have analyzed the production cost of some countries which compete with Brazil on the foreign market. The result turns on a red light on the continuity of the participation of these countries over the next years, coping with an internal production cost way over the practiced value on the foreign market. One cannot survive in this environment unless there are heavy subsidies, as it happens in India.
Since the mid-2012, when we checked the production cost in Thailand, India, Australia, South Africa and Brazil just to mention a few, we have been able to observe a few points that deserve highlighting. Out of these producers, Brazil is the one whose currency has been devalued the most over the observed period, with the real falling 36.57% against the dollar. At the same time, while the production cost at the mill – financial-cost free – was at 15.43 cents per pound, today under the same parameter, it is at 11.71 cents per pound. We should mention that this value doesn’t provide the mills with a margin since the approximate cost to bring this sugar to the port today is 180-200 points, that is, it drives the equivalent FOB Santos cost up to 13.50-13.70 cents per pound, which is a lot higher than the closing price in NY this Friday.
South Africa is the second country on the list with the highest currency devaluation: 31.56% from June 2012 up to now. Its sugar production cost at the mill plummeted from 14.14 cents per pound in 2012 to 11.14 cents per pound. Australia has seen the Australian dollar devalued in relation to the American currency by no less than 24.34%. That way, sugar production cost in that country dropped from 15.27 cents per pound to 12.38 cents per pound.
The struggle to survive on this low-price-in-dollar market is divided between two producing countries: India and Thailand. Sugar in India, whose currency has devalued by 9% over this two and half-year period, has incredibly high production cost, despite the generous 64-dollar-per-ton subsidy. No less than 23.17 cents per pound, which reaches close to 20 cents per pound, without the subsidy. In Thailand, a vigorous sugar exporter, whose currency has stayed practically unchanged since 2012, devaluing only 3%, the production cost – which is information hard to get from that country’s authorities, known for hiding this information from anyone – is estimated to be 16.21 cents per pound. As we know, the production in that country has grown dramatically, just about doubling over the last ten years (from 5 to 10 million tons).
How long the sugar producers in the other countries (Thailand, mainly) will be able to survive at the current low prices practiced on the foreign market is a million-dollar-worth question. Who is ready to answer it?
According to the model developed by Archer Consulting, the fixing volume of the mills for the 2015/2016 harvest until February 28, 2015 was at 34.05% of the export sales estimated for the harvest, at an average price of 16.91 cents per pound, or still by its equivalent in reais of 42.25 cents per pound (with a polarization premium).
Late February last year, the fixed volume of the mills reached 47.01% of the estimated sales. The decrease in fixing volume this year in relation to last year can be explained by a few factors: 1. A lack of credit for hedge operations in NY, whether the mill is using its own futures account with the brokerage houses abroad or using third parties’ accounts (usually trading companies with which they trade); 2. Smaller contract volume for this harvest (the trading companies are suffering from anorexia.); 3. Uncertainty regarding the production mix, which can make sugar less available for export. The fact is that the fixations are at a slow pace.
Have a nice weekend everybody.
Arnaldo Luiz Corrêa
