Weekly Comment – August 7 to August 11, 2017

The sharp fall in the sugar price on the foreign market worries the mills that still have a volume to fix prices against October/2017. The devaluation of the commodity over the last two weeks was beyond what the most pessimistic ones could expect. Some bearish readers who were against my optimism for believing we had already seen the year’s low in sugar (12.53 cents per pound) are waiting for the sugar market to break the above level with the same expectation as the Tic-Tac Crocodile rooted for Captain Hook to slip off the ship straight into its mouth. Take it easy. 

During the week, several mills and even a great producer announced the mix change to ethanol. The fact is that the sugar production cost at the mill is around R$48 per bag on average (there are cheaper mills and more expensive mills, obviously). If we take into account an average shipping of R$100 per ton to carry the sugar to the port and another US$12.50 per ton to cover the lifting expenses and harbor expenses, we come to a total FOB Santos cost of 15.12 cents per pound, or almost 200 points above NY. The hydrous ethanol pays more.

The market might continue falling, because it is like the futures market, and especially the commodities, to go overboard both in the high and in the low. However, regardless of the convictions about the world sugar surplus, the quality of the accurate numbers which emerge from India is always debatable, despite the millions of suppliers of sugarcane in the country. Meanwhile, around here, we are unable to reconcile the number of crushing in the Center-South. It is hard to believe it.

Seasonally, the worst thing in terms of cents per pound must have already been left behind. The accumulated bi-monthly crushing is rising in relation to the previous years and this, although the magnitude of this detail is debatable, has been a destabilizing factor of the prices together with the percentage of sugarcane which is being directed at the sugar production. Better ATR, more produced sugar help the funds to add more sales to their positions and make NY trade below the production cost and the sugar cost on the domestic market and of the hydrous ethanol. These situations do not hold up.

October/2017 closed Friday at 13.20 cents per pound, a 94-point melting in the week, or over 20 dollars per ton. The October/2017 spread with March/2018 points to 85 points of discount, that is, a 16.29% rate a year. This devaluation won’t be able to last long since for the industrial consumer the rationale starts to bother when one compares it to the cost of opportunity.

Buying the spread starts making sense. The NDF (Non-Deliverable Forward) for March comes close to R$1.000 per ton. It is despairing for those who have already fixed at R$1.500 or above that. Only this month, at only eight sessions, we have seen a fluctuation of almost 200 points between the traded low and high. In adjusted figures, today NY trades at the same level in real as that of September 2015.

It is necessary to consider at Sugar’s current moment that the geopolitical factors are affecting all the commodities and the risk assets. That is, there is an important exogenous component inside this huge sugar devaluation when the future depends on “privileged” minds such as Donald Trump and Kim Jong-Um. The commodities are suffering.

In the accumulated of August, sugar is the commodity that has devalued the most: 10.4%. Wheat, soy bran, soy, gas, cocoa, soybean oil, and corn are all in the accumulated negative. In the year accumulated, sugar leads the negative ranking with a devaluation of 31.52%; then there is orange juice with 29.35%, natural gas with 19.71% and oil with 9.18%. The funds, based on this amazing reality, can simply repurchase their winning positions and go to other assets.

The mills’ debts, by late July, reached R$88.59 billion according to the model of Archer Consulting, rising 5.43% against a year ago.

The accumulated consumption of fuels over the last twelve months (July 2016 to June 2017) in equivalent gas has been 53.76 billion liters almost 1% above the same period of the previous year.

If the economy grows by 1.8% in 2018 and by 2.8% in 2019 (numbers by MB Associates) it is possible that in 2019 the total amount of fuel consumed in the country (equivalent gas) will reach 58 billion liters. How much more sugarcane will we have to produce? How much more ethanol will we demand? What is the effect of this on the sugar price?

It is very difficult not to be constructive in the scenario for the sector for the next years, despite the obstacles we can still face and the paradoxes that we touched on here in last week’s comment (

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Have a nice weekend.

Arnaldo Luiz Corrêa

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