The sugar market in NY closed out Friday at 17.56 cents per pound in the contract for October/2022, consolidating a 33 point drop against last week (slightly more than 7 dollars per ton). It turns out that with the weekly appreciation of 5.9% of the real against the American currency, the sugar values in NY converted into real per ton showed an overwhelming drop of R$154 and R$168 per ton on average for 2022/2023 and 2023/2024, respectively.
If there is a lesson to be learned from this volatile market is that discipline must be the priority on devising a risk policy. I will explain. By observing the closing values of the sugar futures contract at the NY exchange converted into real per ton, always taking the first contract traded as a basis and adjusting the values by inflation of the last seven years (sugarcane cycle), in 75% of the events the price curve has been below R$2,218 per ton.
Last week, for instance, driven by the funds, the NY exchange hit 19.59 cents per pound which – with the dollar traded at R$5.4375 – worked out to a fixation of R$2,447 per ton, a price that had occurred just in 8.5% of the times over the last seven years!!
For the 2023/2024 crop, we believe the risk is greater if we fix now, because there are several unclear points in the formulation of a strategy (production cost, size of Brazilian crop, ethanol policy in India, energy market, to mention just a few), but for the 2022/2023 crop the scenario is slightly clearer.
The funds, as we have seen over the last weeks, seem to be going through some existential crisis. One day they buy, another day they sell, then they repurchase and increase the position, then they settle and flip. They are the key players in the neurasthenia that I mentioned in last week’s comment.
Now, according to the COT issued by the CFTC based on last Tuesday’s open position, the funds are short by 41,000 lots. That is, they sold 81,000 lots this week (they were long by 40,000 last week). It takes a lot of intelligence to figure out these movements. Every week there is a new narrative to adapt to the market.
A heads-up: the market is more volatile and can have great fluctuations. The annualized 20-day volatility is at 28%. Five weeks ago, it was at 17%. That’s bad for the put option sellers that were out-of-the-money less than two weeks ago, and are now in-the-money. There is still time, though.
Preliminary numbers show that the adventure of the federal government to lower fuel prices by decree has caused losses of R$15 billion for the sugar-alcohol sector just looking at the reduction in ethanol average price for the mills estimated before the tax changes and the price after them. This is not the first time the sector has footed the bill and it surely won’t be the last. This is the reflex of the policy of “more Brazil and less Brasília” which was the campaign promise of the current dweller of the Planalto. What is the practical effect of this vote-getting stunt? We will find out in 2023.
The number of accumulated crushing in the Center-South released by UNICA, up until the first two weeks of July, reached 233,958 tons, the smallest volume since the 2015/2016 crop. In that year, however, the crop was delayed and ended up totaling 617 million tons at the end. If we smooth over the average of the last eight years of the percentage that represented the crushing of the first two weeks of July against the crop total, we will come to a forecast (without much science) of 535 million tons of sugarcane for this crop.
The Board of Petrobras has more power to oversee its price policy now, but they keep the final decision about the need for readjustments with the executive board. Thus, the company tries to shield itself from future political interference that will certainly come along, regardless of who the dweller in Brasilia in 2023 will be. The major change is that now the procedures of the pricing policy, which used to be informal, are now released on the company’s site. In short, the company’s price policy will keep defining competitiveness and parity with prices on the foreign market. But it’s worth remembering that even the past in Brazil is uncertain.
Have a great weekend.
Arnaldo Luiz Corrêa
