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Sugar

A LONG WAY TO GO
16/02/2024

 

The past week has been somewhat disheartening for the sugar market. The cumulative weekly performance ended in the red, with the March/2024 contract closing at 23.05 cents per pound, an 88-point decrease from the prior week’s close. This represents a decline of almost $20 per ton. The contracts for the 2024/2025 crop in the Center-South, specifically the May, July, and October/2024 contracts, along with the March/2025 contract, experienced declines ranging from 51 to 27 points, translating to an approximate decrease of $11 to $6 per ton, respectively.

The most significant decrease occurred with the March/2024 contract, largely due to the impending maturity of options that took place on Thursday. At the beginning of the week, with the market trading around 24 cents per pound, the total open puts with exercise prices between 22 and 24 cents per pound exceeded 65,000 lots. Naturally, option sellers, fearing being exercised, sold futures to avoid the risk of holding long positions in a declining market. This led to the market dropping to 22.75 cents per pound.

The Net Present Value of the NY close for 2024/2025, converted into Brazilian reals per ton, indicated a decrease to R$2,577 per ton, down R$17 from the previous week. For the 2025/2026 period, this value fell further to R$2,322 per ton, which is R$30 less than last Friday’s figure. Despite this, the 2024/2025 period still presents an attractive opportunity for mills to lock in sugar sales due to the relatively high value. However, it is advisable to couple this with the purchase of an out-of-the-money call option to hedge against potential price increases, even though the likelihood appears minimal under the current scenario.

For industrial consumers, the current price levels for 2025/2026 represent a favorable buying opportunity in cents per pound, with the possibility of securing a more advantageous dollar rate in the future. The discrepancy between the Non-Deliverable Forward (NDF) contract for this period and the anticipated spot dollar rate, as forecasted by the Focus Bulletin, suggests it may be premature to lock in prices in Brazilian reals per ton. Once again, meticulous risk management is highly recommended.

As mentioned in previous analyses, the full impact of the water deficit on sugarcane fields has yet to be fully realized. Current projections suggest a potential reduction in the Center-South’s sugarcane production to below 590 million tons, a factor that could drive sugar prices above 25 cents per pound. Aside from this and any unforeseen exogenous factors, it remains challenging for NY prices to break out of the 22 to 25 cents per pound range.

Should speculative funds decide to increase their long positions in sugar, they could significantly impact the market. However, their focus seems to be on the more volatile and nervous cocoa market, which is a favorite among funds due to its unpredictability. Western Africa’s cocoa production has been hit by diseases and adverse weather conditions, contributing to a market position nearly worth US$9 billion across the NY and London exchanges. While the funds are not solely responsible for cocoa’s remarkable price surge (100% in a year!), the current market fundamentals exacerbate price fluctuations. In contrast, speculative funds have a relatively modest long position in sugar, equivalent to approximately three weeks of Brazil’s sugar exports.

Ethanol stands as another critical factor, awaiting changes in the energy market. With WTI, Brent, gas, and diesel prices facing challenges, optimism is hard to maintain. Additionally, the international corn market is under pressure, trading at carry costs, indicating an oversupply. This could increase corn ethanol availability, potentially affecting sugarcane ethanol prices.

Our analyst, Marcelo Moreira, identifies resistance for May/2024 at 22.50/23.60/24.00 cents per pound and support at 21.90, followed by 19.80 cents. The July-October/2024 spread has returned to a break-even point, potentially leading to logistical challenges at major port terminals, depending on the start of the crop.

Turning to India, the 2023/2024 sugarcane crop’s ongoing production slightly lags behind last year’s output. According to the National Federation of Cooperative Sugar Factories Limited (NFCSF), the 507 million tons of operating sugar mills have crushed 227 million tons of sugarcane, producing 22.4 million tons of sugar. This compares to 236 million tons of sugarcane and 22.9 million tons of sugar produced during the same period last year.

This week, I dedicate my commentary to an exceptional figure in the sugar-alcohol industry, the late Antônio de Padua Rodrigues. A veritable encyclopedia of knowledge and a symbol of elegance, Padua’s generosity and precision have been invaluable to many over the years. His contributions to the industry and the personal growth of those fortunate enough to benefit from his wisdom are beyond measure. Most recently, Padua graciously contributed a text for the back cover of my upcoming book on the market, a testament to his unwavering support for his peers. His absence is profoundly felt, yet his legacy endures. Let us honor his memory by striving for the excellence and generosity that defined his life.

Arnaldo Luiz Corrêa

 

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