The futures sugar market in NY closed the week practically unchanged against the previous week’s quotes. It was a slow week due to the holiday in Brazil on Monday and Thanksgiving Day in the USA on Thursday. Therefore, the week’s balance was of positive fluctuations along the price curve which extends until October/2020, of miser 2 to 8 points, that is, from half a dollar per ton to less than two dollars per ton.
It’s always worth alerting producers to be careful about exacerbated enthusiasm. The market is moving along slowly toward higher levels with a lot of effort. The funds needed to liquidate their shorts nothing less than 50,000 contracts so that the market could go up a little more than 120 points. It remains to be seen whether they will keep on buying. The COT, will come out only on Monday. So, we will have an idea of the current positioning of the funds.
Is the worst over yet? We believe it is. Those 12.50 cents per pound traded in August that a lot of people believed to be the start of the debacle which would make NY go for the 10 cents per pound have never materialized. We find it pretty unlikely that the market can move toward those levels, although there is no way to rule out that possibility.
The good news is that the sugar price curve in NY changed into real, incorporating the spread between domestic and foreign interest rates, points to a profitable financial settlement. In the weighted average of the months used for the 2018/2019 pricing, 1,187 real per ton is obtained, a reasonable return for an average sugar production cost (without the financial cost) of R$42.59 per bag ex-mill. For 2019/2020, the return is better by 6.38% in real, with the average at R$1,263 per ton.
The great paradigm change as to how we watch the sugar market was actually the methodology of gas pricing introduced by Petrobras allowing the mills to see gas prices over the medium and long run and set up parameters for the hydrous via parity. The adherence the sugar market now has to the oil brings along at least another hedging alternative.
The sugar-alcohol sector most likely won’t be held hostage to pricing policies that make it subsidize the biofuel as in the left-wing government of Lula and Dilma, especially in 2008 when oil was being traded over 90 dollars per barrel and the mills were selling ethanol below the production cost. Just to remind that great part of the debt of the mills which today is close to 135 real per ton of crushed sugarcane is due to not only the undeniable mismanagement but also, in great part, to the enforced subsidy given by the PT (Workers’ Party) government to gas to spur the car industry, which deteriorated the margins.
This turning point is starting to be felt by the mills. The more trust there is in the continuity of the pricing policy adopted by Petrobrás, the more the mills will be working in line with the signals that the oil and the sugar markets give. The geopolitical issues that usually affect the oil will rub off on the sugar. The market will change.
Economist Cristina Barros from MB Associates commenting about the presidential elections of 2018 believes that “there is no definite starting grid yet” and many uncertainties hover over the line of succession. Cristina believes that “just by the middle of the first semester next year will we have a clearer idea of this picture”. The conscience about the damage caused by corruption, especially in Rio de Janeiro, which has all its governors since 1995 behind bars, and public security, besides unemployment, will be recurring issues among the candidates. 2018 promises to have a lot of turbulence in the political scenario.
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
