The sugar market in NY closed the week at a high, after a long period, closing at 15.51 cents per pound for July/2017, with a 20-point high. Since February, the market hadn’t closed in the blue (except for a week in which it varied a really low 1-point high).
The commodity market exaggerates highs and lows. The moods heat up the same way when strong movements of purchase or sale occur. For example, it was normal to find bulls when the market traded close to 24 cents per pound in October 2016, just like bears are found now that we are close to 15 cents per pound.
We have to carefully evaluate the facts that can determine – from now on – a price recovery on the market. The fall of sugar since the 21.49-cent-per-pound peak this year to 15.12 cents per pound on April 27 encourages the mills to redo their projections of sugar production.
The cash flow effect ethanol produced for the mills due to the ease and liquidity and, mainly, the tax credit of PIS/Cofins, means an appealing parity for the mills to produce more fuel rather than sugar. This detail, not taken in by the market yet, can make 47.5% become unfeasible in this scenario of low prices and a review to 46% can be viable.
So, the sugar availability to be produced in the Center-South for the 2017/2018 harvest can experience a decrease by up to 2 million tons. The current scenario also makes the expansion of countries such as Thailand, whose production cost estimated by Archer Consulting is 15.46 cents per pound, ex-mill last February prices, difficult.
Another point that stands out is that consumption of fuels in gas equivalent over the period from April 2016 to March 2017 has matched the same period the previous year, that is, with the GDP falling by 3.6% the consumption of fuel has remained unchanged. The GDP/consumption relation shows that when the economic activity drops, the consumption of fuels fall less and also when the economic activity speeds up, the consumption of fuels increases even more.
Well, if Brazil recovers its growth in 2018 and elects a president who is committed to the development, who is liberal and pro-market, we might watch an acceleration of consumption of fuels as already happened, for example, at the end of Lula’s second term in 2010 when consumption reached 8.33%. And that’s where the structural problem we will have to face lies.
Since the 2009/2010 harvest in which the Center-South crushed 542 million tons of sugarcane up until the current 2017/2018 harvest, whose number by Archer Consulting foresees a production of 586 million tons of sugarcane, the yearly average expansion over the period was less than 1%, a lot less than the growth of the world consumption (2.1% according to ISO) and below the average of the growth of Brazil’s main competitors.
Our estimate shows that the sugarcane deficit in Brazil for the next two harvests (2018/2019 and 2019/2020) should come to almost 50 million tons of sugarcane, conservatively taking into account a sugar export of 27.1 and 27.7 million tons, respectively.
Looking at the short run it is always difficult to bet on what prices will do tomorrow. But the unbiased fundamentalist view unequivocally shows us that the sugar market is constructive in the long run, especially because in Brazil there is no possibility of production expansion that meets the potential demand in the upcoming years.
The solution, which we have talked about here, again and again, will have to go through the combination or the choice to import more gas, corn ethanol, or increasing fuel prices for the end consumer.
Having said that, we think the visit the market pays to the neighborhood of 15 cents per pound will have a really short life and the funds that bet on a steeper sugar price fall might fall flat on their faces as already happened to their participation in coffee last year. In the second semester, it won’t be surprising if sugar prices in NY go back to the 18-20 cent-per-pound level – unless some extraordinary exogenous factor is present.
But what can push the sugar market in NY further down? Well, some points must be carefully observed: a) if oil stays below the 50-dollar-per barrel level together with a strengthened real for a long period of time; b) if the Center-South produces beyond 600 million tons of sugarcane; c) if the funds add more sales to their short position (they didn’t do it this week); d) if Petrobras decreases gas price (based on the foreign price, this possibility exists).
Those who watched Lula’s deposition to judge Sérgio Moro see that former president’s shamelessness has no limits. One hour and forty-five minutes into the deposition, Moro asks Lula if he knew if Petrobras former director Renato de Souza Duque had some relationship with PT’s former treasurer João Vacari Neto. The former president said he didn’t know. Two minutes later the judge asks if Lula had already been with Renato Duque. The former president stated he had and that he had asked Vacari to call Duque because he wanted to clear up allegations released by the press about the former director having kickback money abroad. The judge asked why Lula had called Vacari to contact Duque if he had just said that he didn’t know if both were friends. Lula got all mixed up. Meanwhile, that Blue Label is waiting impatiently…
Archer Consulting 28th Intensive Course on Futures, Options and Derivatives – Agricultural Commodities (in Portuguese) will be held on September 19 (Tuesday), 20 (Wednesday) and 21 (Thursday), 2017 from 9:00 am to 5:00 pm in São Paulo, SP at the Hotel Paulista Wall Street. Don’t leave it to the last minute and enjoy the discounts.
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Have a nice weekend everybody.
Arnaldo Luiz Corrêa
