The futures sugar market in NY closed the week quoted at 14.41 cents per pound for March/2018, a 43-point high against the previous week’s closing – 9.5 dollars per ton of positive variation which was followed by highs between 2 and 8 dollars per ton in the subsequent trading months which stretch until May 2020. The average price of the corresponding closings to the 2018/2019 harvest (May/2018 until March/2019) including NDF (Non-Deliverable Forward) amount to R$1,120 per ton.
While fresh news about the sugar fundamentals does not reach the market, we will be doomed to watch all the effort for the market to go up – pushed by the funds covering their shorts – being compensated for by the avalanche of still pending sales fixations on the part of the mills. Which fundamentals would these be?
First of all, the crushing numbers by UNICA for these last fifteen days showed a decrease in the accumulated crushing in comparison to the same period last year: a 1.9% fall. Although the accumulated production of sugar over the same period has been almost 5% above last year’s, what is striking is the recent propensity of more sugarcane being targeted at ethanol. Two things can still push prices up: an even greater decrease in the crushing over the next fifteen days and the confirmation of the tendency of more sugarcane being converted into biofuel.
Secondly, reiterating the thesis that was discussed in the earlier comments, the importance that oil will have from now on to sugar pricing. We will need more time to see what the reaction of the market will be like in case of a vigorous increase in the oil price. The markets are more and more interconnected. Sometimes we just don’t realize how much.
In this line of thought, I enjoy remembering the episode of the mad cow case, a fatal neurodegenerative disease which hit the cattle and occurred at the start of last decade. It was found later that the disease was associated with the cattle feed with meat and bone meal which was used for livestock feed use. As a sugar trader, at the time, while following that through the news agencies, I ignored the subject matter thinking that such “mad cow” phenomenon had nothing to do with sugar. I made a mistake there – big time.
The thing is when this type of contaminated feed to the cattle was withdrawn, the demand for soy meal and corn started increasing. The soy meal price rose strongly in Chicago and due to the crush margin, soybean and soy oil also increased. The next commodity to be affected within this equation was corn. With corn demand, due to the demand for soy meal, its price also went up. Corn ethanol competed with raw material and the high prices opened up room for the demand for sugar ethanol whose price was more competitive. Then, sugar ethanol price increased on the foreign market and, finally, sugar was affected increasing in the same proportion. Many traders at the time, like me, completely ignored the possibility of the mad cow disease taking up an important place in the sugar market. Lesson learned.
Oil and gas (RBOB) will have an increasing impact on the pricing of the Brazilian ethanol and indirectly on the sugar price via parity. This factor is not duly appraised on the market. Sugar is the commodity that has devalued the most over the year and the funds are just waiting for a spark to set the profit taking off. Will it come?
Up until late September/2017, according to the model of Archer Consulting, the mills had already hedged 4,215 million tons of sugar at an average price of 16.31 cents per FOB pound, without polarization premium, which should represent about 15.5% of the total Brazilian sugar export estimated. The average price of fixation is R$1,223 per ton, including the polarization premium and adjusted by NDF . This value is equivalent to 53.22 cents per pound. The average dollar obtained by the mills was 3.2632 real.
The yearly accumulated percentage of 15.5% is the lowest since the 2015/2016 harvest. Last harvest, over this same period, the fixation percentage was at 27.07%. Some factors support this delay in fixation: lack of credit on the part of the trading companies, delay in fixation of the 2017/2018 harvest which made the mills look at the next harvest in second plan. The steep sugar price fall on the foreign market, mainly as of April, discouraged the mills to fix prices.
Don’t miss it! The registrations for the XXIX Course on Futures, Options and Derivatives on Agricultural Commodities which will take place on March 6, 7 and 8, 2018 in São Paulo, SP at the Hotel Wall Street are already open. Twenty percent of the spots have already been filled and the course is still six months out. Don’t leave it to the last minute. For further information: priscilla@archerconsulting.com.br
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Have a nice weekend.
Arnaldo Luiz Corrêa
