The sugar futures market in NY closed out the week with May/2021 at 16.38 cents per pound, a slight drop against last Friday, after having briefly been around 15 cents. We still believe the sugar market will have trouble staying above 16 cents per pound.
The premises are the same: uncertainties as to the global economy recovery; income reduction; work from home, less mobility and consequently less outdoor consumption; Brazil supplying the world with sugar adequately (it provided an additional 13 million tons of sugar over the last twelve months against February/2020); and India supposed to export 5.5 million tons (3.2 million already contracted). These are at least the most important ones.
Many mills that fixed their export sugar for the 2021/2022 crop look back, possibly regretfully, and think that if they had waited longer to fix it, they would have obtained better prices. This is and will always be the hedge dilemma: you will never hit in the bull’s eye and once the fixing level has been chosen, the account is closed. But there are alternatives to participating in the high trend.
It’s important to remember that the 35% devaluation of the real against the dollar between January and May last year changed the sugar curve in real per ton. What we have been suggesting everybody right now is that the fixation in real per ton be accompanied with the simultaneous purchase of an out-of-the-money call with 200/250 points above the market at fixation in the respective futures contract. Whoever chose this strategy recovered half of the difference between the fixed value in real per ton and the current market value.
At any rate, the fixations in real cents per pound are the highest over the last ten years: an average of 67.12 based on Archer’s last survey. We cannot but point out that the maturity of the sector as far as professional risk management is concerned has been admirable. I would dare say that in the Brazilian agribusiness, the sugarcane sector is the most connected with hedging. In the past, when there were opportunities to fix sugar at highly profitable prices, the internal risk policy prevented many companies from fixing sugar for a crop that hadn’t yet started being produced. This has changed a lot. Today there are companies that are pretty well fixed for 2022/2023 and even 2023/2024. It is undoubtedly a paradigm shift.
When it comes to ethanol, I worry about what might happen to Petrobras from March 20 on, with its competent president Roberto Castello Branco’s departure, after having delivered an amazing profit of R$60 billion (US$ 10.7 billion), pulling the company out of the well it was in. Since Bolsonaro seems to go for what is worse, he should replace him with one of these generals in pajamas, who certainly don’t know the difference between an oil barrel and a gunpowder one. The senseless intervention of the president was a shot in the foot, scaring away investors and increasing their suspicions that Brazil’s legal uncertainty is far from being resolved.
This is an important red flag for the sector, because the real continues devaluing, gas and oil prices are on a high trend on the foreign market and the driving season in the United States causes a boom in fuel consumption. That is, prices in real will continue to go up. Maybe Minister Guedes will whisper into his boss’s ear what is about to happen.
And dear readers, what do you think the president will do? He will have to find someone to pin it on since he never takes the responsibility for failures in his government. My feeling is that the sugarcane sector will foot the bill, just as it did during the six years of the likewise disastrous Dilma Rousseff’s administration. Over that period, the sector lost R$70 billion (US$ 12.5 billion) between administrative prices and the reduction in ethanol participation in the consumption of light vehicles.
On a different note, the most recent numbers of global sugar consumption published by the USDA (Department of Agriculture of the United States) show, year over year, that the estimated consumption for the 202/2021 crop compared to the five previous crops has gone up by only 0.53% per year. If we smooth the curve, using a five-year moving average, the number changes to 0.74% per year.
The good news is that by analyzing the behavior of the per-capita consumption of the biggest consuming countries and the expectation of the population growth, according to the World Bank data, our model shows an increase in world consumption of about 1.15% per year for the next five crops. Half of this growth comes from Asia. The total consumption will exceed the current 174 million tons to 184 million tons. China, India, Indonesia, Pakistan and Egypt add up to 5 million tons together.
In the short term, an attention-worthy issue is that the funds have reduced their long positions by 16,850 lots, according to the CFTC and the market has gone back 110 points. To me, it seemed like a great fall for a small number in reduction of their position (they are now almost 220,000 lots long). What if they decided to reduce the position by 50%, for some random reason?
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Brazil lives a tragedy every day – the number of deaths due to the pandemic grows fast and alarmingly and we still don’t have enough vaccines. The macabre occupant of the Palácio do Planalto, who doesn’t care about the health of the population, continues governing heartlessly. Whenever he opens his mouth, he causes crises and harm to the country. How much longer will we, tax payers who voted for this fellow to get rid of PT, have to put up with having such a totally irresponsible, unbalanced and unprepared person ruling the country? Civilized Brazil is already gasping.
There is not much hope for better days. Surrounded by ministers who don’t know their own area of action, with rare exceptions, and afraid of anyone who can overshadow him due to his undeniable cognitive dysfunction, the occupant of the Planalto will only make the situation in Brazil worse and lead us to the abyss in the 22 months left in his term. It cannot be ruled out he might venture into some unconstitutional acts to stay in power, just like Trump, as some renowned jurists and political analysts have alerted. Whoever has the courage to say to more than 260,000 families who have lost their loved ones, “How much longer are you going to keep crying? Enough of this fussiness and whining! ” This is an endless nightmare.
Have a nice weekend everybody.
Arnaldo Luiz Corrêa
