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Sugar

GOVERNMENT STRANGLES THE MILLS WITH GAS SUBSIDY
22/03/2024

The sugar futures contract in New York for May/2024 closed out Friday at 21.86 cents per pound, a 25-point drop against the previous week’s close. All the other contracts closed out with average 10-point drops. The week was pretty poor in terms of news that could bring some momentum to the market, be it up or down. So, the negotiations stayed within an interval of little more than 120 points between the low and the high.

Unless climate interventions change the setting, most traders foresee that soon we will see a sharp carry curve between May/2024 and March/2025, especially if India, contradicting current expectations, decides to free export volumes after the elections in May. So, the sugar futures market is expected to fluctuate between 20 and 21 cents per pound during lows and between 23 and 24 cents per pound during highs. This configuration can represent an excellent opportunity for the industrial buyers to reduce their raw material costs through the strategic sale of puts, while the mills could benefit from a call spread to maximize the value of their sales. However, it’s important to remember that we are facing a strategy that demands patience and long-term view.

The market annualized volatility experienced a meaningful increase, with the 20-day average reaching 42.70% against the volatility average of the last twelve months, which was 29%. This increase in volatility can be interpreted not only as a risk but also as an opportunity. On the commodities market, such as sugar, the volatility is affected by a series of factors, among which are adverse climate conditions, supply and demand fluctuations, global economic variables as well as political and geopolitical issues. Therefore, dear readers, it seems like the sugar market is sailing according to the fundamental laws of market dynamics, totally fulfilling the forecasts and expectations set by the market “manual”.

We have relentlessly discussed the impacts of the climate conditions on the agricultural production and the market seems to be pretty focused on these issues. However, when we turn our attention to the domestic political and geopolitical setting, it becomes imperative to analyze the approach of Lula’s government when it comes to the sugar-energy sector. Though the official discourse of the current government fosters the incentive to the renewable energy market, their acts have been criticized due to the lack of a clear direction. During the COP28, at the end of 2023, Lula highlighted the ethanol relevance in the context of the energy transition, pointing out that 90% of the energy consumed in Brazil is renewable, thanks to the adoption of ethanol, biodiesel-oriented policies, and investment in green hydrogen. Recently, the House of Representatives passed legislation which increases the percentage of ethanol blended into gas and biodiesel into diesel, with the possibility of the ethanol mix reaching up to 35%. This legislative advance represents a meaningful step for the sector and reinforces the commitment to the sustainability and the fostering of clean energies.

Nevertheless, in a clear demonstration of usual dissonance between Lula’s promises and his concrete actions, the government has artificially been keeping gas prices low by means of a direct intervention in Petrobras, causing an extremely negative impact on the ethanol mills. Right now, gas is undervalued by about 22.80% against the foreign market, according to data released by the Brazilian Infrastructure Center (CBIE). This lagged price policy at the refinery calls ethanol competitiveness into question, whose economic feasibility is intrinsically linked to a gas price that reflects the market conditions. By selling gas below the market value, Petrobras not only jeopardizes its own financial health but it also seriously weakens the ethanol sector. And ultimately who is forced to bear the losses from this unbearable policy? It’s the Brazilian taxpayer.

Oh, Lula’s excuse for freezing gas prices – protect the buying power of the less privileged classes from the devastating inflation rate – is utter fallacy. The argument falls through when the inexplicable decision to cut the distribution of Petrobras dividends, a measure that could have provided a robust injection of resources into the National Treasure safes, relieving the pressure on public accounts and, in turn, effectively protecting the buying power of the more vulnerable segment of the population. The truth is that Lula’s understanding about economy is as shallow as a chimpanzee about Quantum Physics. The indisputable fact is that if the 22.80% gap in gas prices was eliminated, it would result in an increase in revenue by at least R$ 0.30 per liter for the ethanol mills, significantly reducing the loss that production of hydrous ethanol represents today. This setting highlights a disastrous economic management, where decisions are made without taking into account their long-term consequences for the economy and the population.

Lately, those who take advantage of rallies (period when prices experience a substantial and sustained increase) of the dollar have been lucky. Last week, the American currency even traded at R$5.0300, but ended up closing out the week at R$4.9999. For you to have an idea of what these spasms represent, you can pocket about R$30.00 per FOB equivalent ton. Not bad.

Our analyst Marcelo Moreira has a message. ”May/2024, after having traded at the week’s low of 20.88 cents per pound last Wednesday, was able to recover and close out at 21.86 cents per pound. With the stochastic indicator closing out Friday showing “sale”, May/2024 finds a first important 21.80 cents per pound and 20.80 cents per pound, respectively, support/resistance. Breaking “upward” the “support/resistance” at 21.80 cents per pound, the next resistances are 22.90/23.50/23.70 cents per pound. In the other maturities – July/24 and October/2024 – we have important 22.40 and 22.30 resistances, and 20.60 and 20.70 cents per pound supports, respectively.

You all have a nice weekend.

Arnaldo Luiz Corrêa

Receives weekly comments from the market







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