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Sugar

HERE AND NOW
26/06/2020

Receives weekly comments from the market







 

“A good economic study usually reveals that the
best time to buy something was last year.”
Marty Allen (1922-2018)
American comedian
  

The human brain is wired to look for patterns under risky conditions. When a threat of some nature occurs, our brain assesses the risks and goes into the memory files for stored patterns which coincide with that situation present at that point.

When the picture is totally uncertain, the nervous system gets overactive working under huge stress in search of an answer to fight or flee. It’s like the old story about two friends who are walking through a forest together and come across a lion. One of them puts on some running shoes he has in his backpack right away and his friend, stunned by the reaction, remarks, “You don’t expect to run faster than the lion in those running shoes, do you?”. “Of course not, I just need to run faster than you”, he answers. The survival instinct prevails in extremely stressful situations.

As a renowned veteran from the commodity market – today in his office on the delightful American west coast next to Napa Valley – would put it, “we are living in moments of epic uncertainty”. If the combination of simultaneous bad news were part of the storyline of a science fiction movie directed by Spielberg, it would make us leave the movie theater laughing about such an unreal plot. I have to say that I truly believed in the words of the Israeli history professor, Yuval Noah Harari, author of the best seller “Homo Deus: A Brief History of Tomorrow”, where he says that the world would never go through wars, hunger and plagues again. Unfortunately, he messed up big time. But he makes us aware that we are living in times requiring across-the-board reprogramming.

We are all reprogramming ourselves, although we have no clue about what we will find ahead. Admitting we don’t know something is a complicated task and often costly. Two decades ago, I had a co-worker – an Exchange director like me at the time – who is one of the most intelligent people I have ever met, with a Cartesian reasoning and endowed with great financial creativity. He used to say “I don’t know” when he really didn’t know something.

In today’s society, driven by the social media which give voice to a horde of idiots, everyone has become an expert and nobody says “I don’t know”. It’s amazing how everyone thinks they know about any subject matter. Some years ago, an agribusiness journalist admitted to a co-worker that he would no longer interview me about the market on his live program because when asked me about a certain subject matter, I dared say “I don’t know”. It’s part of the show.

Every day we are bombarded with a range of issues whose answers, paraphrasing Taleb, are immersed in binary predictions, bets or beliefs – how much is a CBio?; where is the dollar headed?; have we seen the oil price slump?; will Trump be reelected?; how many tons of sugar will be delivered in July?; what will happen to the post-Covid-19 economy? Your bet is as good as anyone’s.

Contaminated by this hostile environment, the decision-making process in corporate live is often run over by the non-extendable demands. Kahneman has already proven that many times we make irrational decisions disguised with all irrationality. However, there are very few executives who admit to that. But what is the way out?

I think we have to work with here and now. There are so many complications in this huge net on our sugar/ethanol market that noise in the decision-making process is inevitable. The futurology exercise we need to do so as to, for example, project the demand for hydrous at the end of the year and what the price will be then is stressful.

Covid-19 has intensified the number of shifts, turning the decision-making into an extremely upsetting process for the executive. The order is to simplify. We must resort to that principle which emerged in the US Navy in the 1960’s that states most systems work best if they are kept simple rather than complicated. That’s the KISS system (Keep It Simple, Stupid!)

What is real and simple is that fixing export sugar prices (for this and the next crops) at the current levels seems to provide limited risk of being a bad deal. The ingredients for this indigestible recipe increase more and more: devalued real; more sugar to be produced by Brazil; India openly speaking about producing 32 million tons of sugar for the 2020/2021 crop which starts in October; the International Monetary Fund preparing more distressing predictions (a 4.9% downturn in the world and 9.1% for Brazil) for what will be  the greatest world recession over the last 100 years, having even suggested that the  countries implement fiscal stimuli because the recovery in 2021 will be slower than expected; and, to make a long list short, the huge bottomless hole caused by the deterioration of the sugar and fuel consumptions worldwide. Having said that, why not pricing sugar then? What could the rational behind this denial be?

The sugar futures market closed Friday at 11.52 cents per pound, a nearly 12-dollar fall per ton against last week. The real, in turn, offset the fall by devaluing by 2.80% in the week and closing around R$5.4600 per dollar. The prices in real per ton (linearly) for the 2020/2021, 2021/2022 and 2022/2023 crops closed at R$1,480, R$1,496 and R$1,480, respectively.

The sugar physical market has cooled down, with July shipment premiums shrinking quickly. The port congestion also has decreased in intensity and the large delivery which everybody was expecting for July will no longer happen.

I truly believe that although we are at the start of the crop, Brazil is unlikely to export the volume a lot of people were betting on for this period (numbers ranging from 26 to 30 million tons of sugar). But India will export the most – at least it shows it will. The country has increased the area for sugarcane by 8%. In addition, lower tax revenue by the Indian and Thai governments due to the shrinking of the economic activity between 5.3-5.8% for this year should turn the government subsidy into a harder account to close within a cycle of greater production and smaller consumption.

The macro picture has deteriorated even further this Friday. The week closed in the red for the energy market with gas (RBOB) falling by 10%, natural gas by more than 7%, corn ethanol by 6.5%, and oil by 4%.

Hydrous traded at the equivalent to R$1.6300 per liter tax-free ex-mill, which corresponds to the sugar in NY at about 9.60 cents per pound, that is, a 192-point discount. So, why do we hear so many people on the market worried about decreasing the sugar mix, which today generates more than R$200 per ton equivalent over hydrous, to eventually produce ethanol and try to earn from a possible fuel price increase at the end of the year? Give ‘em KISS.

Have a nice weekend everybody.

Arnaldo Luiz Corrêa

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Receives weekly comments from the market