The futures sugar market in NY closed the week at a discrete high against the previous Friday. March/19, now the first contract traded at the NY exchange, closed at 11.20 cents per pound, just a 5-point high against the previous week.
India shakes up the foreign market with the huge subsidy on export sugar approved by that country’s government. Brazil needs to file a representation before the World Trade Organization at the risk of deconstructing the sugar-alcohol sector.
It’s just about impossible to compete on the foreign market when a country, whose production cost is above 18 cents per pound, has sufficient subsidy to flood the sugar world, jeopardizing all the others, especially Brazil, whose cash flow cost is around 12 cents per FOB Santos pound. If we have the most efficient mills of the world here, it is hard to imagine that some producer in the world is making any money. You just have to look at the balance sheet of a big European company from the sector.
The crisis gets worse with the real devaluation, which puts the debt of the mills above R$157 per ton and restricts credit even further, increasing the discount on the negotiations of physical contracts for 2019/2020, creating a snowball with unimaginable consequences.
On the futures market, we have seen the October/March spread ending up trading at 102 points in the week, after the drop in prices in NY following the Indian announcement. A spread this big means that October was trading at an equivalent 25% discount per year against March. That is, extremely advantageous for those who will ultimately receive sugar in October (which occurred this Friday) and overwhelmingly wonderful for the funds which roll over their short positions adding on this huge market carry. At the contract maturity for October/2018 only 5,337 lots were delivered adding up to 270 thousand tons of sugar. I wonder how March will respond on Monday.
Over the last twelve months, the two contracts of commodities with the best performance were WTI oil and Brent oil, which went up 44.4% and 42.5%, respectively. Over the same period, sugar had the worst performance, dropping 20.4% and coffee dropped 20.3%. This combined performance, with energy going up and softs going down, assert that the speculative funds are in no hurry to settle the short position they have, whose volume up until last Tuesday was at 132,000 lots, equivalent to 6.70 million tons of sugar. Besides, the macro scenario isn’t good for the commodities at all and the possibility of a stronger dollar down the line isn’t encouraging at all.
Fábio Zenaro, director of Counter Products, Commodities and New Businesses at B2 (former BM&F Bovespa), provided important advice in an article published by Valor Econômico newspaper last week, which should be framed and hung on the wall of any CEO of any company (mainly of the Brazilian agribusiness). He said, “The use of derivatives as part of the policy of risk management of the companies is an essential tool for the financial health. Not having a hedge policy is extremely damaging and dangerous; there are several instances of companies that didn’t survive the test of time for not having adequately carried out the market risk management to which they were exposed”.
The assertion of the director of the Exchange fit the sugar-alcohol sector like a glove. I would only add that the hedge policy should not be outsourced; it has to build its foundations at home. If outsourcing is inevitable, at least the physician (who prescribes the medication) and the drugstore owner (who sells the medication) shouldn’t be the same person. The stories we hear on the commodities market (grains and softs) when both are the same person are chilling.
The risk that Haddad might win the presidential elections in Brazil is increasing. It is impossible to predict the disaster that his possible election would bring onto the economy, politics and the good citizens’ morale and if this Lula’s dummy put on the presidential sash. Besides, it is disheartening to see the manipulation of the Brazilian press in favor of the left-wing. Even credible newspapers and journals, which should excel at serious and investigative journalism, make room for the usual crooks. There is no telling what the result of all this will be, but there is some unhealthy smell in the air. Purchasing puts out of the money for March/2019 can be a protection if Brazil elects someone from this criminal organization again.
Registrations for the XXXI Intensive Course on Futures, Options and Derivatives in Agricultural Commodities, which will take place on March 19 (Tuesday), March 20 (Wednesday) and March 21 (Thursday), 2019 at the Hotel Paulista Wall Street, in Bela Vista, in São Paulo (SP), are open. For further information, send an email to priscilla@archerconsulting.com.br. We recommend that the participant read the book Derivativos Agrícolas, which can be found at iTunes, Amazon, Livraria Cultura or www.estantevirtual.com.br, before attending the course.
Have a nice weekend.
Arnaldo Luiz Corrêa
