Despite the political earthquake which shook Brasilia this week because of JBS executives’ plea bargaining, sugar had a good performance, with futures contract in NY for July/2017 closing Friday traded at 16.38 cents per pound, a pretty robust 87-point high (19 dollars per ton) against the previous week. October/2017 and March/2018 also closed at a significant 77 and 66-point high, respectively, at 16.59 and 17.08 cents per pound.
The funds hardly changed their positions and still continued short sold (based on Thursday’s numbers) by about 27,000 lots. They might have covered part of this volume this week.
The feeling on the market seems to be more positive these days. That doesn’t mean we will see 20 cents per pound tomorrow, but some evidence points to more constructive prices from the third quarter on this year. Eighteen cents per pound is an absolutely feasible price level.
Some mills have been approached by their buyers who suggest they repurchase the hedges they made, getting 80% of profit in cash. Imagine if you have hedged at 20 cents per pound and repurchase at 16.00; your buyer pockets 0.80 cents per pound and you go home happy with 3.20. The break-even point for you is to make a new hedge at 16.80 and for your buyer, it is like he stayed long in futures at 15.20. Any risk manager will recommend the mill NOT MAKE this type of operation. Discipline and responsibility towards hedging are important elements for risk management.
An interesting point to be observed over the past week is that the sugar values in NY converted into real per ton had a substantial improvement – last Friday the NY closing pointed to poor R$1,113 against R$1,233 this Friday. That is, 120 real per ton! Many mills with professional financial management increased their fixations for 2018/2019 a little, taking advantage of the sudden hike of the dollar in face of the political turbulence. Nervous markets usually offer great opportunities if you can keep your cool.
Based on Archer’s calculations, unfortunately, the crisis we went through over the week increased the sector’s debt by R$2 billion, since the sector has part of it backed by the American currency.
We believed that the scandal involving president Temer would pressure the dollar much harder and, therefore, sugar in NY. However, there is a point where a too strong dollar against real ends up hitting the ethanol parity because the imported gas becomes more expensive in real. The gas prices at the pump are now in line with the foreign market. Thus, Petrobras has little strength to keep prices unchanged for the consumer in case real continues to be shaken by the turbulence coming from Brasilia or if there is an increase in oil price on the foreign market.
Nowadays in Brazil, it is almost impossible to set, predict, measure and let alone imagine the extension of the rot that the relations between a great part of Brazilian politicians and the great entrepreneurs is. Not even the Marquis de Sade, Boccaccio, Nabokov or the Devil himself (the original one, not the eneadactyl) could come up with a plot so full of promiscuity and debauchery under a Messalina-like scenario such as the characters inhabiting the brothel that houses the national politics. It is smelly open sewage. A bunch of thieves and murderers, considering the number of people who die in this country without medical care in the hospitals due to a shortage of health resources or because of urban violence due to a shortage of safety resources. It is taxpayers’ money that pours out of these criminals’ pockets. There is no criminal sentence that can pay for the crimes committed by this damned gang.
Some years ago, the Russian consultant Andrei Parabellum at an event in São Paulo came out with this, “Who has a lot of people coming to you and asking you for a free advice?” he asked a crowded audience. “Do you want to know the perfect answer? I always ask, do you want and advice or a consultation.” “What’s the difference?” they ask me. “Well, advice is short and free and consultation is more detailed and costs money”. And they say, “I want some advice, of course.” My advice is “Go get a consultation”
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) 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 our discounts.
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Have a nice weekend.
Arnaldo Luiz Corrêa
