Many years ago when I was working for a multinational company, a co-worker from another department was carrying a huge long position of a certain commodity. The market was giving him a hard time. He would buy and the market would fall. He would sell and the market would go up. It was really one of those tricky phases for this poor trader. In the middle of letting off steam at that bar table, on a rainy Friday after work, on a day when he had taken another beating from the market, he came out with, “this market is wrong”. It is impossible not to remember that joke made by the guy who would drive down the mountain toward the seacoast in the wrong way and on the radio the radio announcer would give a heads-up, “watch out driver, there is a crazy guy in the wrong way on the road”, to which he replied out loud to himself, “not just one, there are several”.
This introduction goes to show what is happening to the sugar market today, after this bloodbath we saw over the week. March/2018 closed the week at 14.05 cents per pound, a sharp 93-point fall in the week, or more than 20 dollars per ton. All the other maturities had a similar performance, with falls between 23 and 97 points, that is, a price shrinking from 5 to 21 dollars per ton.
Surely the market is not wrong. The funds which got into a long position too soon might be wrong right after having zeroed out their short position and pocketed a profit estimated in more than 400 million dollars on a market that lacks support. They started out long and as soon as the market fell due to exogenous reasons, they threw the long position back up pressing the market and drawing new sellers to it.
The adherence the sugar market got from the oil market because of the pricing policy introduced by Petrobras, as we said here a few weeks ago, brings more volatility to the price because it is another factor of influence on the price curve. Most of the reports about the oil perspectives which have gotten to the market point to lower prices, within the level of 50 to 60 dollars per barrel, although a few analysts believe we are at the end of this cycle and getting into another one of 60 to 70 dollars per barrel.
The low volatility of the sugar over the last weeks has made us believe that the market was happy with the price range between 14.50 and 15.50 cents per pound. The average price of the closing in NY for November was 14.97 cents per pound and our price forecast model, informed to the clients, points that December would have a drop to 14.61 and January would too (14.20). The average for December up to now has been 14.63 cents per pound.
If the market stays at this level of 14 cents per pound, I believe we will just dam the huge difference there is today between the price of ethanol and sugar, speeding up the ethanol production at the start of the next harvest and worsening the availability of sugar for next year. Would 14 cents per pound be a great buying opportunity? I would say it would.
Brazil exported until November/2017, in the 12-month accumulated, 29.4 million tons of sugar, an amount that contrasts with the weakness we have seen over the months on the spot market, but that somehow explains it: the great amount of sugar traded this year was bounded to long-terms contracts of the mills with the trading companies. Those who decided to sell on the spot, that is, at the last minute, had to give greater discounts in order to trade the product. On the other hand, the shortening of the discount on the FOB market over the last weeks shows there is some concern over the availability of the product for the start of the next harvest.
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A group of sugarcane producers responsible for about 10% of the volume of sugarcane traded in the country wants to demand an additional pay on top of what they already get for the sugarcane through Consecana.
The proposal of the group is that a premium be paid by the mills to even out the difference, according to them, of the current model that works out the value owed by the mills to the delivered product. Everybody knows that Consecana takes into account the volume of extracted ATR after the processing of the sugarcane delivered by the producer to the mills. Would this demand be fair?
A year ago exactly, in our weekly comment of November 25, 2016, whose title was “Time to Review Consecana”, we argued that the sector urgently needed to promote a wide discussion about the efficiency of the pricing model of Consecana. Although, for a long time, Consecana seemed to reflect the wishes of the sector and fairly define the pay of the sugarcane suppliers, it was unquestionable that in certain moments – such as that one we lived in the last quarter of 2016 – the model equally harmed the mills and the sugarcane suppliers themselves.
I used as an example that the risk policy of most mills recommends that the percentage corresponding to the production of sugar from third parties’ sugarcane not be fixed. The risk that the mill will fix third parties’ sugarcane explains itself because if the market stays on the rise, the higher cost for sugarcane it will have to pay the supplier might affect the final product profitability already fixed (sugar).
I strongly argued that by following this advice, the mil watched the May/2017 contract trade at 23.00 cents per pound without fixing any of the part corresponding to the supplier’s sugarcane. This existing “immutable law” at most mills that they should not fix third parties’ sugarcane for believing that it has a natural hedge is a fallacy. Both have lost out – the mill which did not fix and, therefore, the sugarcane supplier. Suppliers and mills have to look for models in which both can win on rising market (which was the case last year).
Therefore, although the demand of the producers will finally make them understand the imperfections of the system and be able to sit down at the negotiation table looking for fairer criteria, to want a premium for something that the mills have not actually obtained is to want to socialize losses.
The ideal thing would be to have an ATR futures contract at the Exchange where each one could fix their price when the market allowed for it. As this is utopian at the current stage, maybe a mechanism where the supplier could partially fix the sugarcane price by using the sugar or oil futures market (for ethanol) could be looked into.
What we can agree on is that a long time ago we gave a heads-up here that the Consecana needed reviewing. That time has come.
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 still open. For further information: priscilla@archerconsulting.com.br
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Have a nice weekend everybody.
Arnaldo Luiz Corrêa
