The sugar market in NY closed the week well, at a 41-point high against the previous Friday, that is, more than 9 dollars per ton, with March at 15.37 cents per pound.
The average of the daily closings in November is already at 14.86 cents per pound, which is 4.4% greater than the average of 14.23 cents per pound seen in October. Our price forecast model pointed to lower levels for November against October, but we also commented that the performance of October had been lower than the expected and it looked like there had been, as already seen in other occasions, an inversion between the two. It looks like this is happening. In short, October and November have changed places. Should we blame it on the rollover?
Though the recovery of the prices on the futures sugar market seems to be shy, the fact is that there has been an appreciation over 100 points in just 9 sessions. It can appreciate even further as there is absorption by the participants regarding the new scenario taking shape ahead pointing to the maintenance of a production of sugarcane and ATR – stagnant for a long time – demonstrably insufficient to meet the probable growth in ethanol demand.
Do you want an example of the price recovery that is taking shape ahead? When we draw the curve of the oil price traded at the NY exchange over the next twelve months and add the real curve to it plus the spread between internal and external interest rates, we create a third curve which provides us, in theory, with Petrobras gas realization price, that is, the import fuel value by the Brazilian state-owned company. Entering this value into the structure of gas pricing to the consumer (which includes, as we all know, 27% of anhydrous ethanol), we come to the top value of the gas per liter at the pump to the consumer. Well, similarly, if we assume that the hydrous ethanol in order to keep its competitiveness can cost up to 70% of the gas value at the pump and if we compare this value to its equivalent in sugar, we are in for a surprise.
Taking into account what has been said before, the sugar in NY will need to go up at least 100 points on average to be at the same level of profitability as that of the hydrous. The mills have long been making these calculations, which don’t reflect two factors, just to mention two, which are the joint assessment of the oil on the foreign market and the dollar against the real.
Let’s take a look at these two plausible ends for the short term and how much influence they can have on sugar. The first one is the combination of oil at 65 dollars per barrel and the dollar at R$3.4000, and the second one is oil at 50 dollars per barrel and the dollar at R$3.2000. Putting this data into the model, we come up with two scenarios. The first one, which can be seen as optimistic, places the break-even point of the ethanol over the next twelve months at the equivalent to a VHP sugar at 16.58 cents per FOB pound. The second one, pessimistic, the break-even point would be at 15.68 cents per pound. The average of the quotations in NY for the next twelve months, based on Friday’s closing, is 15.43 cents per pound. In short, under the worst scenario, the increase in relation to the average of the future months which make up 2018/2019 is 25 points. Under the best scenario, it is 115 points.
Cross combinations, such as oil going up with the dollar falling or oil falling with the dollar going up, offset each other and don’t affect the respective ends. How deep will the analysis that the funds make about these possibilities be? What drives them to still keep a short position which holds small possibility of falling even further? How much money is still on the table to wait on this?
The industrial consumers of sugar in Brazil should ponder whether this wouldn’t be the ideal moment to fix the price of the raw material. The mills, regardless of the scenario which still needs muscle, should not miss out on opportunities to fix their sugar if the prices hit R$1,200 per ton.
The funds covered 50,000 lots and, of course, the comparison of fluctuation between the two dates will lead us to conclude that it took 67,000 tons to move each little point over this period covered by the COT Report. Too bearish, isn’t it? Let’s see how the market reacts. And what if the funds have already started turning the tide building a long position? It has been commented that many mills have fixed their sugar.
It was interesting to see the “overwhelming number” of reports this week, most of which increase the surplus. Even the headlines of some news agencies were somewhat biased, maybe unintentionally. “Fake News”, joked an experienced trader of NY, Bill Maher stuntman in his free time. I don’t know, but I think I smell burned bear fur in the air…
Professor Marcos Fava Neves reported in the social networks the invasion of a productive rural property in Bahia by the criminal organization called MST (Landless Workers’ Movement), a branch of the Workers’ Party, another entity from the same garden. The comments made by the distinguished Professor went viral and were shared more than 16,000 times. This entity, were we a serious country which respects the sacred right to private property, without the contamination of whataboutism politics of the left that insists on perpetuating itself in Brazil, should be welcomed with bullets. The Brazilian agro-business deserves respect. Brazil needs 16,000 Marcos Fava Neves to report and share this shame sponsored by this criminal group headed by Lula and his 400 thieves. They deserve to be put behind bars. Where is my Blue Label?
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
