The intermittent rains at the Santos port have been causing some impact on the logistics of the sugar flow from the production areas. Rainfall puts the loading procedures at the port on hold, since the port operations for sugar loading requires adequate weather conditions to happen.
In light of this scenario, the trading companies are forced to temporarily discontinue sugar shipment from the mills, because the continuity the process is jeopardized without the possibility of loading, with jam-packed terminals. As a direct consequence, the mills face an operational dilemma: given that the recently-produced sugar cannot be shipped and stock space is finite, there arises the need to cut production short; so, will mills produce ethanol? Well, we know it does not work quite like that.
Some mills have realized that their production will go beyond the amounts previously agreed on in the commercial contracts set up with the trading companies, resulting in a sugar surplus. This situation of surplus production, of course, implies that the additional volume of sugar had not been contemplated by the buyer in the early logistic planning for the shipment to the port.
In light of this extended and not contractually secured offer, the trading companies have found a bargaining opportunity. They capitalize on the existing logistic bottleneck and the greater sugar availability of the mills to propose acquisition of this surplus at more advantageous prices. According to reports of some market sources, the discounts offered in these additional purchases can reach a 250 to 300 points.
The mill comes up against a critical commercial decision: to accept the sale of sugar with a significant discount proposed by the trading companies or redirect the production to ethanol, which is subject to a discount of 1,350 points on the domestic market. Upon pondering its options, the mill can be influenced by the immediate need for liquidity and by the evaluation that a sale with discount can be preferable in a loss-making or a high fixed costs situation without the corresponding revenue.
The deep discount bidded by the trading companies, despite unfavorable, can be seen as a feasible alternative under the current circumstances. The trading companies, in turn, make a commercial point based on the port logistics. They can justify the discount based on the increase of the waiting time for ship loading at the Santos port, which can come to about 32 days. This delay in the port lineup translates into additional costs that the trading companies look to minimize through the proposed discount. In view of what has been exposed, the mill can consider the trading companies’ offer as the most pragmatic option, choosing to go ahead with the sale even with the margin reduction instead of facing the challenges and uncertainties of the ethanol domestic market.
The lineup at the port is a temporary condition, and it is hoped that it will normalize over time. The market consensus is that the current lineup will not last until the start of the next crop in the Center-South. Historically, the first quarter is known for registering smaller volumes of sugar loading, representing about 19% of the yearly total, which means that a decrease in the sugar flow directed to the port over this period is expected and can be thought as being within the seasonal normal. With the prediction for a natural reduction in the waiting lineup for loading, the trading companies are ready to take advantage of the moment of transition.
With such a large discount, the trading companies can even deliver purchased sugar “cost-free” against the expiration of the futures contract of July/2024 even if the purchase has been made against March/2024. An experienced market executive told me that is why a big trading company delivered sugar against October/2023. It could – according to him – have sold the V23/H24 spread (that is, it sold October/2023 and bought March/2024 at the same time). It delivered the product in October/2023 (on the short leg) and will receive in March/2024 (on the long leg) to be priced with this discount. According to the same executive, there are more than 50 dollars per ton on the table in this operation.
The excited bulls are eagerly hoping that by the end of the year the market will listen to them and trade in the 30 cents per pound. For such a scenario to come true, it is essential that the speculative funds take on an aggressive posture, pushing the market towards the desired direction. The speculative funds, instead of accumulating buying positions, have chosen a significant liquidation of 17,700 lots according to the COT (Commitment of Traders) published Friday by the CFTC based on last Tuesday’s position.
It has been this yo-yo. They liquidate the position, then they start buying, then they sell, then they start buying again and so on. Over the last two weeks, this activity has kept sugar prices stuck within a narrow and relatively static interval: when the market comes close to 28 cents per pound, selling pressure comes along; inversely, upon reaching 26.50 cents per pound, buyers come into the market, supplying support to the prices. This alternation between buying and selling pressures creates a cycle that can be frustrating for those who are after a more defined trend and clear trading opportunities. Let us see how long this game will go on for.
Over the week, New York closed out Friday with March/2024 at 27.78 cents per pound, a positive fluctuation of 44 points (9.70 dollars per ton) against the previous week. All of the months until July/2026 closed out with an average appreciation of 31 points (6.80 dollars per ton). The real currency, however, presented accumulated appreciation over the week against the dollar by 2.26%, with the American currency closing out at R$ 4.9030. This appreciation made the average value of New York quotations converted into the Brazilian currency shrink about R$30 per ton. That is, the net value this week – despite the NY high – is smaller than that of the previous week.
A pretty well-informed bird with its wings deep into the Indian sugar market whispered in my ear that we could be saying goodbye to the gold-priced sugar days soon. According to it, get ready to blink and see the price go down to 25 cents per pound faster than one can roll up a welcome rug. And it does not stop there: according to it, the conversations at the next Sugar Dinner in London will have a more bitter taste, with the price possibly falling to 23 cents per pound. I rest my case.
You all have a great weekend.
Arnaldo Luiz Corrêa
