The year is almost over. In fact, good riddance! I have no doubt that 2020 has been good for the sector, but the stress we have gone through with the new coronavirus pandemic this year has been – to say the least – harrowing. It has been risky to plan, difficult to develop strategies and even harder to put them into practice in the midst of a whirlwind of bad news, of the irrational volatility of the real and the paralysis of the global economy. Those who got it right this year were those who decided using the elements they had on hand, that which was more feasible, for instance, the export sugar pricing in real per ton, which provided the mills with huge margin.
The average sugar price in NY plummeted from 15.07 cents per pound in February to 11.81 in March and endured prices (that even broke the 10 cents per pound), but succeeded for another four months in staying on the average above 11.25 cents over this period. For those who think in terms of real per ton, February reached R$1,506 and the March/July average was 10% below that. The market started recovering as of August, but the average reached before the pandemic didn’t repeat itself.
More recently, the market fundamentals started to prevail and the thrust given by the purchases of the funds run by robots and algorithms lost strength. The average of the NY closings this December is 3% lower than last months. The optimism that led the traders to believe that NY could go beyond 15 cents per pound and stay there has petered out. This week, the funds have reduced the long position by 16,766 lots (850 thousand equivalent tons), but they are still almost 196,000 long.
NY closed out the week with March/2021 at unchanged 14.44 cents per pound. This month, the futures contract for March/21 has traded at a limited price interval. And the volume has also dropped by about 15% against November.
In December only, the sugar value in NY plummeted R$150 per ton against the average of November. The decision-making process within the mills has to be faster so as to avoid the loss of opportunities. And let the sugarcane suppliers hear us – it’s high time the Consecana calculation was changed. Mills did not fix at R$ 1,500 per ton because the sugarcane belonged to third parties. Therefore, it’s typically a no-win situation – both the mill and the sugarcane producer lose.
With the information we have now, what we see ahead is that next year we should have a smaller sugarcane yield and a low of up to 4 million tons in sugar production compared to this crop. We believe, however, that the smaller sugar availability will be neutralized by the combination of a few factors: a) smaller world consumption due to the pandemic; b) global economy downturn; c) use of stock as China and Thailand have done; d) lack of money to meet the subsidies (India); e) stagnation of the energy market, among others.
In order for the sugar market in NY to break the 16 cents per pound consistently, we would need a perfect storm: a) an overwhelming drop in sugarcane production in the Center-South due to the drought we hear so much about; b) the robust and fast recovery of the world economy due to large scale vaccination; c) the resumption of the energy consumption restoring mobility; d) the appreciation of currencies of emerging countries against the American dollar.
Assuming a weaker dollar for 2021 (let’s imagine R$4.7000 at the end of next year), NY would need to go up 250 points on the expirations of the 2021/2022 crop (May to March) in order to repeat the average prices of R$1,700 per ton. What do you think about it, dear reader? Is that feasible? It would have been better to have followed the strategy we commented on here several times: sell sugar in real per ton and buy an out-of-the-money call to participate in a potential high in NY.
India has finally passed its export subsidy for the 2020/2021 crop: a total resource of 35 billion rupees (about US$476 million) covering a volume of 6 million tons of sugar, that is, about 360 equivalent points to NY. That country’s domestic market, as we know, has a minimum price of 31,000 rupees per ton, but it is showing signs of weakness. The industry, however, believes that the Indian government will increase the minimum price to compensate for the decrease in subsidy. They’re talking about 34,500 rupees per ton which, if brought into effect, would take the break-even point of Indian export sugar to between 17-18 cents per pound NY equivalent. In our view, preserving the status quo, it is unfeasible.
The last time the Indian government readjusted the minimum sugar price was two years ago and since then the Indian accumulated inflation rate has been 9.75%, that is, the industry demand isn’t pointless and aims to correct the buying power of the Indian currency eroded by inflation. The thing is we are in the middle of a pandemic which empties the government safes all over the planet and India is suffering from the downturn of the economy, the decrease in sugar demand and the fear on the part of the exporters of delayed subsidy payments since they have received only 20% of the subsidy owed in the 2019/2020 crop closed last September. It’s only natural that the industry is worried.
Archer Consulting will promote its next online courses in March and April/2021. Both new introduced modules got very good evaluations by the participants. The Essential Course will be held in the week of March 22 and 26. Now, the Advanced Options Course will take place in the week of April 5 and 9. The sooner you sign up, the larger the discount will be. For further information, contact priscilla@archerconsulting.com.br
—
We learned with great sadness about the passing of Herbert Francis Penfield, one of the pioneers of the futures commodities market in Brazil. Herbert worked at Anderson Clayton in the 1960’s, then the largest coffee exporter in Brazil and next for more than 6 years at another major exporter back then, Tristão. In 1976, Herbert started Penfield Commodity the only one having a telephone hotline with Chicago trading floor (back when communication was scarce and expensive in Brazil) – and the most important commodities brokerage in the country. Herbert was a tutor and teacher for various generations of traders, brokers, having been president of the Commodity Exchange of São Paulo, along with other icons from the sector. A man of brilliant ideas, quick thinking and with a great innovative spirit, he was an important figure in the development of the futures market. Someone once said that great teachers never die, they keep on living in the soul and in the memory of their pupils. As an admirer put it, “There goes the last romantic of the coffee market” – rest in peace Herbert.
—
This is the last report of 2020. We would like to take this opportunity to thank all our clients, friends and readers for another year together, especially this year that has been so grueling and when the world has fought an incessant battle against an invisible enemy. We know, through science, that 2021 will be a year that will demand extra resilience, because the vaccine will not allow us to let go of masks and precautions we have been taking so far. I wish you all a lot of health, peace, resilience and hope that 2021 will bring a lot of achievements. You all have a Merry Christmas and a Happy New Year. We will be back the first weekend in February.
Arnaldo Luiz Corrêa
