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 “I can’t give you the recipe for success, but I can give
you the recipe for failure: try to please everybody.”
Herbert Bayard Swope (1882-1958)
American journalist



The sugar futures market in NY closed Friday with July/2020 trading at 12.05 cents per pound, 17 points better than last week’s closing. The volatility of the real once again fostered the mills – rightly, by the way – to keep on fixing export sugar prices for this and for the following crops.

The prices obtained in these fixations, taking into account the simple average of the closing of the corresponding months for each crop, that is, equal percentage for May/21, July/21, October/21 and March/22 to make up the average of the 2021/2022 crop and so on, showed nearly R$1,500 per ton FOB Santos for the three remaining months of 20/21, R$1,478 per ton for 21/22 and R$1,458 per ton for 22/23.

The speed-up of pricing by the mills reaffirms the high degree of commitment in risk management more and more present in the day-to-day life of the sector companies. The drive, professionalism and focus the companies have developed over the last years pays off when opening and renewing credit lines with financial institutions more and more restrictive to risk.

Be it due to credit restrictions, difficulty in cash flow management – usually tight – or even convenience, many mills hedge indirectly (in the trading company account, or via NDF, a foreign currency contract with cash settlement, with banks, with OTC providers, and so on.) If they could use options more freely, the added value would be much greater. However, the daily adjustment is a ghost living in the imagination of every manager who has already experienced the magnitude of the destruction of a margin call. Our estimate is that over a crop, well-structured operations using calls and puts add on 6 dollars per ton on average.

The eighth estimate of Archer Consulting found that 21.1 million tons of sugar of the 2020/21 crop had already been fixed until May 31. Given that our export estimate for the crop is 23.5 million tons of sugar, the fixed volume up until that date was 89.8% – the greatest percentage since we started this survey ten years ago.

The average value of this volume is 12.91 cents per pound or 56.82 cents per pound (both without considering the polarization premium), equivalent to R$1,305 per FOB Santos ton (including pol). Last year, over the same period, the average value of fixations was 13.04 cents per pound equivalent to R$1,163 per FOB Santos ton with pol. The real devaluation made the difference.

Comparing the current curve of sugar in NY to the one two months ago one can notice that there has been an intensification of the contract fixations with longer maturities. The corresponding months to the 2022/23 crop have dropped by 18 dollars per ton against the average of the 21/22 crop, which has dropped 21 dollars per ton against the current crop.

Reports by several renowned analysts from around the globe show that the world sugar consumption is falling. The range of the numbers is of the same magnitude of the uncertainty which strikes each one of us. The only fact is that the sugar consumption falls and so does that of fuel. However, the physical prices are sometimes on the oil market path and sometimes on the opposite of the real trajectory. This is what this week was like. The real dropped by 5.20% against the dollar, but regardless of that the short-term sugar went up. Sugar closed equivalent to R$1,468 per ton, that is, almost R$90 per ton in the week.

India should announce a new export policy for the 2020/2021 crop, which starts next October. The Indian production is estimated at 31 million tons of sugar. The consumption reduction in that country, in line with the rest of the world, in addition to the increase in sugar production compared to the last crop are encouraging components for the increase in that country’s exports. India and Thailand should have an economic slowdown of 5.8 and 5.6%, respectively.

In a webinar done by a commission house in the USA and I participated in last week, I was asked two questions which show different kinds of concern over Brazil.

The first question is about the level of indebtedness of the mills and its percentage in dollar, because not all of them would be benefiting from a stronger dollar considering they are indebted in the American currency. Our estimate is that by late May the debt of the mills in Brazil was 111.3 billion real, of which 36% was dollar-based, which creates an average debt of R$173 per ton of crushed sugarcane.

The second question is about the possibility of Brazil having a military government (coup). My answer was “zero”. The Brazilian Armed Forces respect the Constitution and the institutions of the country are strong despite the authoritarian raptures of some people.

Brazil’s image abroad, as we have said here, is the worst in several sectors. Could Brazilians have lost their capacity of indignation? It’s unbelievable that administration after administration, ever since President Lula’s first term in 2005, good Brazilians are taken aback with corruption cases which shake the foundations of the power. With the arrest of Fabrício Queiroz, former advisor to the President’s son, due to suspicious banking operations, we can be sure of one thing: things will get a whole lot worse in the political arena. Bolsonaro’s administration will drag along for who knows how much longer. And another year goes by without us having the so much desired political, tax and administrative reforms.

Good news: journalists Carlos Raíces and Bruno Blecher created EstúdioAgro (listen to it on Spotify), a podcast designed for the agribusiness always bringing big names in the sector to talk: professors Alexandre Mendonça de Barros and Marcos Jank, for example, were the last interviewees. It’s worth checking it out.

Have a nice weekend everybody.

Arnaldo Luiz Corrêa

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Receives weekly comments from the market