The futures sugar market in NY closed Friday hitting 10.63 cents per pound for October/2018, 40 points above last week’s closing (almost 9 dollars per ton).
If we adjust the price curve in NY taking March 2020 and bringing it to present value with a discount rate of 5%, 6%, and 7%, we realize that the sugar quotations in NY over the period that runs from March to October/2019 have an average discount of 20-25 points. This goes to show the pressure these months suffer, probably due to the excessive devaluation of the real projected via NDF (Non-Deliverable Forward) which encourage some mills to start fixing their sugar for the next harvest.
The average fixation value for the 2019/2020 harvest based on Friday’s closing is R$1,138 per FOB Santos ton. For 2020/2021 it is R$1,249 per ton. The market closed the week with October at almost R$1,000 per ton. There is no doubt that there has been a huge recovery on the part of the market, which has not been more significant due to the delayed fixations, already commented on here several times.
The non-index funds have increased their short positions to 177,000 lots, while hydrous ethanol has valued internally over the last weeks. I see these two points as being important in order to provide the market with a slight support, although it is on the floor right now. From now on we will note that the final crushing of this harvest in the Center-South will be much smaller than we originally thought it would be and the amount of sugar produced at the end will fall short of the 27-28 million tons of sugar we expected.
The effect of this scenario will not be felt right away, that is, not until after the closing of the current harvest in early 2019. Among several agricultural managers, it is hard to find someone who is optimistic about the quality of the sugarcane field, about the observed reduction of investments and expansion and even about the little cultural care jeopardized by the mills’ cash flow stress. Although a number projection of the crushing for the next 2019/2020 harvest is as efficient as calling in a fortune teller to see where the sugar market is headed, the fact is that the consensus points to 540 million tons of sugarcane.
Another supporting point is the Brazilian currency. The real has suffered from the stormy electoral scenario. When a left-wing candidate comes along with a legitimate possibility of advancing up to the presidential election run-off, the real devalues much further. We have an unclear and pretty segmented scenario since the leading name in the polls (if anyone believes them) is that of an outlaw and convicted criminal who is already behind bars.
The candidacy of the greatest outlaw of the country was turned down this Friday by the Superior Electoral Court putting a damper on the speculations that the prisoner could run for president. Rumors such as this (that the head of the gang can be a candidate) only help the financial market sell more protections and shove down the throat all kinds of bizarre structures with a volatility premium that a buyer won’t ever be able to recover. In short, the pressure on the Brazilian currency might decrease a little as of Monday.
A share of the sold fund is part of the long/short operation which consists of staying long in certain commodities (in this case energy, RBOB, WTI oil, Brent oil) and short in soft commodities (mainly coffee and sugar). We will have to keep track of how coffee will behave in NY. Since coffee is extremely sensitive to the dollar, the appreciation of the Brazilian currency (based on what we have said above) as of Monday (actually, Tuesday, because Monday is a holiday in the United States) can make the funds take profit in the long position they have in coffee. If this repurchase also contaminates sugar, we can keep seeing a price recovery.
If the market bets on hydrous reaching a ceiling price of R$2.0500 per liter in the off-season, that is, in December/2018 and January and February/2019, this value represents (if the minimum relationship of 65% between hydrous and gas is kept), sugar in NY would need to go up to 14.38 cents per pound. As we said on the last weekly comment, sometimes the market in NY can trade at even 100-point discount. That is, the market would have room to go up about 200 points over the period of December/January/February – make your bets ladies and gentlemen.
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Have a nice weekend.
Arnaldo Luiz Corrêa
