The sugar market in NY had a weak performance during the week and closed Friday at a fall of more than 10 dollars per ton against the previous week. The futures contract for March/2017 closed at 14.98 cents per pound, 47 points below last Friday’s. All the other months were also pressured with falls which ranged from 25 to 43 points, or 5.50 and 9 dollars per ton.
In our last comment we warned that an eventual enthusiasm of the bulls should be dealt with moderately because although the fundamentals are constructive over the medium term due to the smaller availability of sugarcane for the 2018/2019 harvest in the Center-South, from a perspective of improved consumption of fuels and more robust oil prices, the uncertainties about the world’s sugar surplus (which ranges between 500,000 tons and 9 million tons depending on its interlocutor) put a ceiling in real per ton into the trader’s head. For example, R$1,200 per ton FOB equivalent with pol seems to be the goal to be reached, and any penetration of quotes into the territory of prices which allows for this result draws a greater number of sales.
There is no telling now how much of the volume rolled over from October to March has been actually fixed. During the week our model should show by how much the pricing of the mills in NY grew during November. By late October we were at 19.4%. I imagine we will get up to 25%.
Several mills are redoing their sugarcane crushing numbers for next year. Most of them not only believe we will have a smaller crushing volume but also a smaller yield because of an older sugarcane field. The clearer this scenario becomes, the more likely we will have price correction. November closed with a price average of 14.97 cents per pound in NY. This is the third straight monthly average high: 13.93 in September (high against August), 14.23 cents per pound in October and now November. Over the last six years, the average price in NY for December has never been above the average price of November.
One of the points we have heard on the market is that fuel consumption in equivalent gas has grown modestly and it points to a more consistent growth in 2018. If the GDP grows by 2% next year, some analysts bet on the fuel consumption growing by 5.5%. By October this year, the fuel consumption in equivalent gas over the period of twelve months (from November 2016 to October 2017) was 53.9 billion liters. If a 5.5% growth occurred, it would represent 1.1 billion liters of ethanol which would mop up 2 million tons of sugar. That’s possible.
The funds are long by 15,000 lots. I doubt they will rush things this time around like they did last year when they artificially put at least another 300 points on the fair value of the sugar. There is no fundamental that will support this at the moment. However, at least, there doesn’t seem to be (except for the delays in the fixations by the mills) fundamental which will knock the prices down by 14 cents per pound, for example. But why is this happening? It’s because of the oil.
We have identified a correlation of 92% in our model of price forecast of hydrous which is based on the oil price on the foreign market. Although the data has been collected just as of August because of the introduction of the pricing policy of Petrobras, it still has to be tested longer so we can feel the consistency. There was a need to introduce a delay to the curves since Petrobras does not interfere with prices immediately, but with a delay which was captured by the model.
What can knock down the sugar market at the current stage? The oil price below 50 dollars per barrel (Brent), the stronger real against the dollar (3.2000), which together, would mine the competitive edge of the ethanol against the sugar and would make the mills, even before the start of the 2018/2019 harvest, redo their plans decreasing the production of ethanol. There is still a long road ahead.
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
