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Sugar

BRAZIL MIGHT HAVE 4-MILLION-TON DROP IN SUGAR NEXT CROP
20/11/2020

Receives weekly comments from the market







 
 
“Brazil has too many donkeys for little alfalfa”
Carlos Frederico Franco (1964-   )
Lawyer and Sugar Trader

 

The sugar futures market in NY closed out the week at 15.25 cents per pound (March/21), a 35-point high against last week’s closing. All the trading contracts had a positive outcome which represented about 6 dollars per ton on average in the week’s variation. The real also closed out the week with a 1.25% appreciation against the dollar, closing out at R$5.3882 and bringing the weekly sugar variation for the 21/22 and 21/22 crops positive numbers of 16 and 6 real per ton, respectively.

The concern among the mills over a possible decrease in sugarcane production for next year due to the water deficit that has hit a great part of the sugarcane regions of the Center-South has been increasing. Though still assuming that a lot of water can pass under the bridge, or more rain can fall on the sugarcane fields until March, there is already a rumor about a loss of at least 5% in sugarcane production for the 21/22 crop.

This number, if confirmed, can be extremely harmful for export sugar availability next year and, evidently, will have strong impacts on the price of the commodity traded on the sugar futures market in NY.

Any correct prediction at this time is pretty hard to be made because – as we said before – it will depend on the compensation of this water deficit, crop treatments and amount of sucrose, among other factors. This has been a crop of outstanding productivity, but it’s widely believed that the next one will experience a substantial reduction in sugar amount produced by ton of sugarcane, bringing the Center-South average closer to the historic 138 kg per ton of crushed sugarcane.

According to UNICA data, the Center-South produced up until November 1, 564.9 million tons of sugarcane, with a mix of 46.69% of sugar and an average ATR of 144.89 kg per ton, resulting in a total production of 36.4 million tons of sugar.

The accumulated sugar production until early November over the last twelve crops represented on average 89.7% of the total production of that crop year, but over the last five years this average has gone up to 91.4%. It all leads us to believe that we will close out this year (which has seen a production acceleration) around 38.5 million tons of sugar.

Going back to next year and assuming that this much-talked about 5% reduction in sugarcane production in the Center-South is feasible, with the mills keeping on prioritizing sugarcane production due to the profitable prices seen all through this current crop and, finally, an average ATR of 138 kg per ton, the sugar production estimate for the 21/22 crop is 34.5 million tons, that is, Brazil might produce 4 million less tons of sugar next year!!!!

The scenario above is far from being fantasy-like. On the contrary, it’s pretty well rooted in the feasibility terrain. And it can have consequences on the equation of world sugar supply and demand for next year. The quicker the global economy recovers from the pandemic effects if a vaccine is made available, the stronger the response of sugar prices in NY will be.

This doesn’t contradict what we have been saying here for months. Export sugar pricing at the levels we have seen is appealing, it pays production costs with wide margin and distributes huge dividends to the shareholders. Several companies in the sector have released balance sheets showing a high percentage of export sugar fixed for the 21/22 crop. Many have even advanced with fixation for the 22/23 crop already and some – surprisingly – extended protections up until the far away 23/24 crop.

A vigorous increase in prices can hurt the short hedges via margin call and stimulate the covering of futures positions chaotically. We have suggested the purchase of out-of-the-money calls at exercise price around 16 cents per pound to mitigate the margin calls and possible participation in market high, adding value to the initial hedge. The best thing is to have your own futures account, because OTC can have an additional cost of at least R$30 per fixed ton.

We have a long way to go before the expiration of the futures contract in NY for March/21 and we must just deduce what the March/May spread game – being played for ages – will be, to be played by the major market participants (speculators, funds, trading companies, refineries, among others). We have already expressed our assumptions in past comments.

The increased demand for Brazilian sugar which drove the export of the product up by 57% within a twelve-month period can slow down over the next months. Brazil is taking up consumption space not filled by the decrease in Thai sugar availability. Global consumption, though we still don’t have data reflecting the shrinking caused by the pandemic, was already worrisome before it. A consumption that was growing by 0.46% per year before the pandemic will certainly be affected when the numbers are known. Indian only, for instance, due to the Covid-19 lockdown saw the heavy consumption which usually occurs in May every year (greater incidence of wedding parties in that country) and during Ramadan (the country has more than 170 million Muslims) disappear. Together, the cancelation of the two celebrations can represent a consumption decrease of 1.5 million tons of sugar.

From today to mid-February, the funds have two choices: they can roll over their huge long position to the next maturity, which would imply strong pressure on March/21, or they can just settle the position by liquidating it. And I believe here there might be a vulnerability spark. If the funds sell 257,286 contracts, who will be on the other side buying? This scenario gets worse if the pandemic situation keeps frightening the global economy.

Everybody knows how important RenovaBio is for the sector – not only because it assures the production expansion of a renewable fuel, but especially because of the positive environmental impact it provides. CBIO is an asset issued by producers and importers of fuel which represents a credit of de-carbonization per ton of CO2. It represents the monetization of this positive impact. These certificates have a value and are traded on counter (the last ones were R$45.00). Since the beginning, the program has suffered unfair attacks.

Now, the representative of some fuel distributors wants to limit the individual goals set up by ANP (National Petroleum Agency) and claims that the time to fulfill the goal is short. Just imagine the impact on CBIOs prices when the demand is reduced with the stroke of a pen. Besides, the same association has also requested that the value of the CBIOs be limited. What investor will put money into an asset whose value is limited to a certain price level? In short, for the mechanism to work, it has to be allowed to work.

 

You all have a nice weekend.

 

Arnaldo Luiz Corrêa

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Receives weekly comments from the market