The sugar market closed the week at a steep 100-point (22 dollars per ton) drop approximately for July/2014 closing at 16.95 cents per pound, which is a clear indication that no one wants sugar for July/2014 delivery (which expires on Monday) due to its weak demand on the international market.
I must confess I have eaten my words: the spread weakening for July/August at the eleventh hour at Friday’s session shows how weak the sugar market is and is forcing holders of long positions in July to resell them opening a new position for the next maturity paying a 36.5%-a-year-cost. Mathematically speaking, I cannot explain the spread reflecting such a high load of 147 points over the three months separating July from September. In September 2008, the October/2008 maturity was being traded at 12.06 while March/2009 hit 14.26 cents per pound.
Is there a lack of short-term demand? There is the burden of rolling over a more expensive position buying 90 days until the next maturity in the hope that the present price levels improve. Can October turn into July, that is, drop to levels at which July is saying goodbye?
The traders face the tough reality of the dichotomy with which the market lives. On the one hand, the surplus hovering over it, and on top of that the total lack of exports; on the other hand, the perspective that we will have a deficit in 2015. The price curve shows that well. Compare, for example, the spread for May/2015 with May/2016 at the beginning of May this year at the closing on Friday. There was an appreciation of almost 4 dollars per ton then.
Dan Gardner, Canadian journalist and author of Future Babble (no Portuguese translation) tells an intriguing story about the importance of doing small things diligently because they can reach huge and unpredictable proportions fast – a kind of chaos theory linked to human issues he calls “monkey bite factor”.
There are two monkeys in the story he tells in the book. The first monkey attacks a man’s German shepherd. The man tries to break up the animals’ fight at which point a second monkey comes along and jumps and bites him. The bite got infected and since there were no antibiotics back then (the fact occurred in 1920 and the first antibiotics appeared in the II World War), the man died.
It would have been a meaningless tragedy if the man hadn’t been King Alexander of Greece, whose political power was more symbolic than real. The King’s death, however, brought about political consequences in the line of succession (he was married to a commoner) and caused the exiled monarch, Constantine I, to return to the country after a popular referendum. The New Greek government suffered a stunning defeat in an unsuccessful military action in the war against Turkey, which resulted in 250,000 deaths. That is, “a quarter of a million people died because of a monkey bite”, commented Churchill years later.
History is full of such chance events which get little attention when they happen and result in a complex and total upside-down turn for the status quo. It is even possible to draw a parallel between the recent history of the sugar-alcohol sector and how the series of events (not at all fortuitous) can silently lead a sector generating US$40-42 billion a year to its decline.
Lula and Dilma embody the baboons that bit the monarch. In the first PT’s term the then president played another one of his comic operas calling on the sector to invest in the production which would turn the country, according to his megalomaniac navel-gazing tendency, into the Saudi Arabia of clean fuel. Although there was no one from the government pointing a gun at the private sector’s head to invest in new industrial units, the fact is that the official incentive supported the entrepreneurs to invest heavily.
When the pre-salt came up, Lula turned his back to the sector. The perspective of the oil international prices which in 2007 was said could reach 200 dollars a barrel and would make ethanol a viable solution, actually got to US$38 a barrel. The investment tsunami without technical backing created a lot of the bad results we see today. Some mills are closing, others are under judicial reorganization. All of them are trying their hardest to pull through.
Another four years of PT in the government will be enough to wipe out the sector. Look at what is happening to Petrobras, for example. The government’s interventionist policy, aiming at the elections in October and the perpetuation in power hemorrhages the state-owned company cash flow. Oil import value today would represent, in market value, gas at R$3.1800 a liter at the gas station. The difference is 10-20% in relation to the international market. On the other hand, if we were practicing good and healthy market economy, with free prices, ethanol could be traded at R$2.2300 a liter.
Could we be at the threshold of a tragedy we haven’t become aware of yet?
Archer is promoting the 1st Advanced Course on Agricultural Options, attending to requests from various agribusiness segments. It will be a 2-day course focusing exclusively on options about agricultural commodities. The course will be held on July 29 and 30 in São Paulo.
Have a nice weekend everybody.
Arnaldo Luiz Corrêa
