After an extremely productive week on the occasion of the events that occurred in São Paulo to celebrate the 9th edition of the Sugar Dinner, the perception of most of the participants was that the sugar market is a little more constructive. The lower prices (those 12.53 cents per pound seen last late June) are history. Nobody doubts that anymore. What lies ahead depends a lot on the behavior of the oil price on the foreign market and the trajectory of the Brazilian currency amid the political bumps in Brazil.
So, the sugar market ended up closing the week at 14.96 cents per pound, the highest price over the last 100 days. It was a 58-point appreciation in March, or almost 13 dollars per ton, in the week. The other trading months closed at a high between 25 and 48 points. If it weren’t for the huge rollover volume from October to March made by the mills in the hope of fixing better prices, the market today would certainly be above 16 cents per pound.
There is almost a consensus among the trading companies/mills about the crushing predictions for the next sugarcane harvest in the Center-South. The numbers are pretty close, on average (according to the graph drawn up by Novacana) 589.2 million tons of sugar, Archer’s number is 591 million tons of sugarcane. What varies, and that is the one million dollar question, is the mix. More sugarcane will be directed to ethanol although the discussion is about the size of this change.
The understanding that some feasible changes, be it in the increase in sales of flex vehicles, or in the improvement of the economy that propels the consumption of fuel, or in the appreciation of the oil on the foreign market and its immediate impacts on the gas price at the pump, or in the appreciation of the dollar against the real, or still a 2018/2019 harvest that can have a combination of less sugarcane, less ATR and older cane field, or a combination of all these factors in different doses, can pull 4 million tons of sugar out of the circuit has been solidified.
Has the market absorbed that? No. Are the funds worried about this? Of course, they’re not. But a short position as big as the funds have sometimes makes the fund manager get tired of carrying for a long time a portfolio which does not add value anymore. At a certain point, there might be a change of hand on the part of the funds. This occurred with coffee last year and it is possible to occur with sugar. But – and there is always one – the volume of pending fixations on the part of the mills is a great inhibiting factor of a high. On the other hand, the launching of the RenovaBio program this year (a belief in the wheels moved by the purest Scottish malt whiskey) can optimize the correction of the market. And it is at this moment when the irrationality gets into the picture led by the sold short funds. And we know what that means, right?
I was gently asked during the events this week about my alleged “unwillingness” in my weekly comments toward the OTC operations on the sugar market. Well, at the risk of being repetitive, I think I have already said here that I worked at a company (Copersucar) which was the pioneer in using these products at a time (1996) when they were totally unknown on the commodities market and shyly offered by very few financial institutions.
What I see today, on the part of some providers of these tools, is a predatory approach. They don’t alert, nor do they care about the client, about the extent of the risk he is running on certain operations. They seem to aim at the volatility and the margin. What happens is that when an operation doesn’t work to the satisfaction of the client or he sees himself in a situation worse than it was, he won’t trade derivatives ever again. And all the market loses out. That’s why you should know your counterpart well before doing business with him. It’s as simple as that.
Lula won’t be a candidate in 2018. He will again be convicted in March or April 2018 in addition to having his sentence made longer by the Court of Appeal. He has been working on the possibility of not getting arrested in exchange for pulling out his candidacy behind the scenes. It is a real shame for the institutions if that is the case. Lula belongs behind bars together with the other members of the criminal organization he presides.
Next year’s elections will bring huge volatility to the dollar and the mills must be on the lookout for the possibilities that always come up in times of uncertainty. Monitor the variations of the American currency together with the NDF (non-deliverable forward) curve because an advance on exchange (pre-hedge) will certainly be interesting.
It’s worth mentioning here the event sponsored by Copersucar at the Palácio Tangará in São Paulo during the sugar week. You rarely get opportunities to see so many friends and colleagues from the sector of several generations, from the four corners of the planet sugar, at an event of pure entertainment for the diners. Someone commented that a party like that – irreproachable and a must-attend – occurred even with the market at 14 cents per pound, what would happen if contract 11 were at 25 cents per pound? Would it be held at the Buckingham Palace maybe? 2019 has more.
The book “Derivativos Agrícolas”, my authorship with journalist Carlos Raices, is already available at Amazon Books, iTunes, Google Play, Kobo and Livraria Cultura: you just have to access the following link. Good read! https://itunes.apple.com/br/book/derivados-agr%C3%ADcolas/id1294585521?mt=11
The registrations for the XXIX Course on Futures, Options and Derivatives on Agricultural Commodities which will be held on March 6,7 and 8, 2018 in São Paulo, SP at the Hotel Wall Street are already open. For further information: priscilla@archerconsulting.com.br
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Have a nice weekend everybody.
Arnaldo Luiz Corrêa
