The sugar market in NY has reached the lowest quotation over the past five years this week. July/2015 traded at 11.73 cents per pound, the lowest level since January 15, 2009, when it hit 11.52 cents per pound. The real devaluation in the week helped pushed prices down. At this Friday’s closing, July closed at 11.98 cents per pound, equivalent to R$876 per ton FOB, which means a value of R$36.64 per bag at the mill, below the cost of production estimated by Archer Consulting and below the average of the FOB values in real.
The negative variation in the week was frightening. There was an over 20-dollar drop per ton for the first two traded positions in the NY exchange. The other months fell between 10 and 17 dollars per ton. The October/2015 – March/2016 spread, many times pointed out as being an excellent purchase opportunity, devalued even further. That is, the market is giving a 27.58% equivalent per year discount for October/2015 against March/2016. It is something like an R$140-discount per ton for October sugar. And even so the buyer doesn’t do anything. What a phase we’ve been going through!
Besides the obvious explanation on the oversupply of sugar in the world and on the lessening in export businesses in May which, according to some traders, has been by far one of the worst months in terms of volume of sugar traded for export, the record delivery of 1.9 million tons is a bitter pill to swallow. We’re fighting with the Asian trading company over the eventual sugar buying interests on the foreign market.
Those who have been left out of the trading process have to offer more generous discounts in order to appeal to those buyers or to make the hedge for the part which didn’t find a destination pressured by the quotations of the futures market. The funds, on the other hand, are absolutely calm in this apocalyptic environment.
Contango markets encourage the funds to stay short and unless there is some news which changes this perception, there is no reason to slow down. After having settled their short positions and wrongly stayed long for a short period, the funds have sold again and now have more than 55 thousand lots with a natural appetite for adding new shorts. So, fasten your seat belts!
The global average gas price early this week was US$1.11 per liter. In Brazil, gas is being traded at US$1.06 per liter. There is of course a discrepancy of about R$0.16 per liter. If Petrobras will promote some price adjustment is hard to predict, mainly because of the inflationary and political effects which it embeds. It would be good if this practice were adopted so as to avoid the worsening of the situation of the state-run oil company and, last but not least, of the already extensive bill the sugar-alcohol sector ends up having to pay because of this (lack of) policy.
The critical financial situation of many mills feeds the negative spiral of prices which suffers the impact of wrong hedge strategies which contemplated price trajectories which never came true, making vulnerable exactly those who couldn’t be vulnerable. They went for accumulators and now there is only pain. It is wise not to put all the eggs into a single basket. Diversified hedge strategies are healthy and recommended, but when you depend on just one operation which in turn relies on the price trajectory, then things get complicated. Many times that’s the price you pay for being an apprentice.
For the past fifteen years, the lowest price seen during the whole harvest – on the basis of the closing of the first trading month at the sugar exchange in NY – has happened, in 80% of the cases, in the April/May/June quarter and has never happened in the second semester of the year. Highs, on the other hand, are sparser, occurring more slightly in the first two months of the calendar year.
Now some news that will certainly make producers happy: the average price practiced in the harvest for the past 15 years has a close correlation with the minimum price practiced during the same period, showing an adherence of almost 90%.
On the price curve analyzed by Archer, if we assume that the lowest price of the harvest is really 11.83 cents per pound traded last week, the average value for 2015/2016 is shown by the model to be 15.51 cents per pound. If the lowest price, for instance, is 11 cents per pound, the model shows the average price of the harvest is 14.45 cents per pound.
Archer will hold the II Advanced Course on Agricultural Options (Night), from August 17 to August 20, from 7:00 pm to 11:00 pm, in São Paulo close to Paraiso subway station. For further information, send an email to priscilla@archerconsulting.
Have a nice weekend everybody.
Arnaldo Luiz Corrêa
