The futures sugar market in NY closed Friday at a new weekly fall with the contract for March/2018 trading at 13.67 cents per pound, or 38 points down in the week. This is the lowest price traded since September 29. The impression that a large portion of the market had was that an extraordinary volume of pricing on the part of the mills had greatly contributed to the price slipping to the current levels. However, that didn’t occur.
The release of the Commitments of Traders by the CFTC (Commodity Futures Trading Commission) after the closing of Friday’s session shows that the funds, based on this week’s Tuesday’s data, were pretty short and considering how much the open position has varied since then they must be 120,000 contracts short.
We can consider that the market has reverted downward again – having stayed a little more than three weeks nipping over 15 cents per pound – and now it is doomed and on the way to Hades. Wait just a minute – it’s not exactly like that.
I compare today’s market to a huge water-filled balloon we are carefully stepping on one end (bearish market) while the water moves and gathers on the opposing end (bullish market). The funds at 120,000 short contracts on a market which has some extremely sensitive points as it is the case of the sugar right now is explosive, to say the least. I will explain later on.
January might be a month of worrying spasms. Dry weather and the gut-feeling that the Center-South will crush a smaller amount of sugarcane out of an aging sugarcane field take a toll on the productivity. The year will also start out with the perception that we are getting out of an economic crisis and that the expected GDP growth for 2018 can increase fuel consumption by 4 billion liters.
A possible combination of a stronger dollar, oil above 60 dollars per barrel (Brent) under the scenario described above will channel the available sugarcane onto ethanol and dry up sugar production as much as possible. How will the funds find liquidity if they need to pull out of their short positions? I think it will be difficult for them to find Brazilian mills selling sugar taking into account the huge premium which the ethanol is being traded at against the sugar.
There is no doubt that the funds hold a vulnerable position – especially because they are not only short in sugar for a specific fundamental reason, but also because they shorted other commodities too (coffee, cocoa, orange juice, oat, canola, wheat, corn, they are all falling in the monthly accumulated). The end of the year will be very interesting and we might be in for surprises along the price trajectory. If the market sits on the sidelines and keeps a support around the current levels, we can get ready for a reversal. If the fall continues, we might see prices below 13 cents per pound.
RENOVABIO
A lot of people have asked about RenovaBio and how it will affect the ethanol/sugar price in the future. RenovaBio is a State strategic policy which aims at promoting the expansion of biofuel within the Brazilian energy matrix and assuring that there is regularity in its availability. It is not a tax. In order to work, this policy, which has just been passed by the Senate, still has a long way to go before its regulation and implementation takes place.
The capacity of each production unit, through goals set every decade and individualized every year to reduce gas emissions and reach production goals, will be recognized through individual grades for production and energy efficiency, which by the end of the process, will turn this set of efficiencies into credits. That is, the double combination of energy efficiency and gas emission reduction by the production facilities will change into money.
These credits, called Decarbonization Credit for Biofuel (CBIO) will reflect the individual contribution of each production facility for the mitigation of a specific amount, after a thorough analysis, of CO2. The CBIOs will be issued by the production facilities of biofuel once the sale of this product starts.
In other words, the combination of achieving goals of production and reducing the gases resulting from each individual production facility is the forming element of credit. The CBIO becomes a financial tool to be soon traded at the exchange. The fuel distributors will be natural buyers of the CBIO to achieve their mitigation goals of CO2.
There are some questions that embitter everybody in the sector. Is RenovaBio the redemption of the sector? No. Will RenovaBio be a catalyst for the expansion and investments? It can be if the goals set for each decade open up the volume opportunity that justifies such action by the agents. It depends on the global fuel market. In order for Brazil to be able to decrease gas A imports and meet the increasing demand of the Otto Cycle, it will need to produce 820 million tons of sugarcane until 2026, that is, to grow almost by 4% a year over the next eight years. That way it will be able to meet the demand for 32 billion liters of hydrous and 12 billion liters of anhydrous.
The credits corresponding to the CBIOs will be greater, the greater the efficiency of the production unit is. For example, an ethanol mill of simple sugarcane has a credit of 100; if it has cogeneration this credit jumps to 120. If in addition to that there is also biogas, 150. If it adds on second-generation ethanol it is worth 170. Of course, the credits also depend on the volume sold.
RenovaBio fosters a price balance on the market. Let me explain – if the oil on the foreign market is trading at a value that is way above the production cost of the biofuel, increasing the demand for the latter, more CBIOs will be issued and, therefore, its value will tend to zero.
If on the other hand, oil on the foreign market plummets to levels below that of the production cost of biofuel, there will be a greater demand for the fossil fuel and, therefore, an increase in the carbonization. There will be a demand for CBIOs so that the goals set in the decade can be met. The CBIO, in this case, would tend to trade up to the limit of the difference between the production cost of biofuel and the oil price on the foreign market.
This is the last comment of the year. We wish all our readers, friends, clients a Merry Christmas and an Excellent New Year. We will talk again about the market on the weekend of January 20, 2018. See you then.
Arnaldo Luiz Corrêa
