The announcement of the Indian subsidy of approximately 54 cents per ton, something like 245 cents per pound (valid for Feb and Mar) made the NY futures sugar market see new lows this month, trading at 15.31 cents per pound. The performance for the week was negative. The greater pressure fell on farther away months, indicating that the traders think that there may be surprises on the short term. The funds reduced their positions by 12000 contracts, signaling that being short at these levels is riskier than the return it may give.
The sugar cane fields of the Ribeirao Preto region looked very dry to me. The specialists say that it is too early to tell whether the crop will be damaged but even the most conservative of them already admitted to this writer that he reduced his estimate by 1.5%, which is still not a lot to turn one bullish. However, on the other side of the coin another trader commented that this is a drought of “biblical proportions”, whatever this means. Maybe it is the 3 and a half year drought prophesied by the prophet Elijah during the reign of the king Acabe. Our current drought is less than that.
Playing with the numbers and admitting that we will have a crop more ethanol oriented than last year, if there is a loss of 5% in the sugar cane production in the Center South due to the lack of rains, the result will be a reduction of 1.7 million tons of sugar and 1.4 billion liters of ethanol. In other words, with a 5% loss Brazil by itself will zero the global surplus of sugar. The effect of this on NY sugar prices will depend on how scared the funds will be to cover their 90,000 lots naked short. If, on the other hand, we end up having a drastic reduction in production of 10%, for instance, in this case we would see the evaporation of 3.4 million tons of sugar and almost 3 billion liters of ethanol. This would be catastrophic.
Where the prices will go with a drop in production of sugar cane can only be predicted using a crystal ball. What we can analyze is, for example, what is the highest price level seen in the past 3 years, 32.99 cents per pound! On that 28th of February of 2011, the dollar was being quoted at 1.6630. Now the highest price in reals FOB Santos equivalent in the last 3 years was R$ 1,240. Today this value equals to NY being traded at 22.50 cents per pound, higher almost 45% than Friday’s closing price.
A coffee producer friend of mine used to say that “a good frost is the one falling on the neighbor’s yard”. The sector being fragile and needing money, with a percentage of fixation already elevated (market says 30% while Archer model has it at 40%), having less sugar cane means less money in the system. More mills may be accelerating their process of Chapter 11 triggering the perverse mechanism of credit restriction for the sector. This without considering the probable reaction from the government that would massacre the mills owners due to the diminishing of the ethanol availability and consequent greater imports of gasoline by Petrobras. Dilma, the protector of the agro business, would be furious.
Marcos Fava Neves is one of the greatest specialists in the Brazilian agro business. A tenured professor at Sao Paulo University, author of several essays and regular speaker in many seminars around the country, made an astonishing remark on social media last week, that was brought to my attention by an executive from the market. Marcos said that he “has been around the world defending Brazil since 1994. To see now one condemned by several scandals, a corrupt person, someone who destroyed the country and Petrobras, someone who has had his prime minister, his party president and his congress president during his mandate now being thrown in jail, and yet still being commended by the media and groups from the agro business, the same people who applaud by speeches and reads my texts, is indeed a betrayal. My desire today is to throw in the towel. Please forgive me but our society is destined to failure”.
It has been a long time since ethics has left Brazil. Lula, Dilma and the PT people have inverted completely the values in our society. They openly defend the condemned criminals from their party, making them victims instead. They subvert the language by changing the meaning of words. The “elite” now is no longer something that is best in the society but rather a class to be fought against according to their party’s book of this unclassified and perverse people. What sustains them is power is the aid which prefers to give one a fish rather than teaching him to fish. Quotas, party affiliation and dubious mechanisms are privileged in lieu of true meritocracy. They invest zero in education since the more ignorant the people are the better since they will keep feeding from the government tits forever. This mob that infests the country is being multiplied at a geometrical progression, being fed by taxpayers money. People of the caliber of Marcos Fava Neves are hard to find today. The discouragement and lack of will to fight by the good people are understandable.
Do not forget to register for the XXI Intensive Course of Futures, Options and Derivatives that will take place on March 25th, 26th and 27th in Sao Paulo.
Have a good week.
Arnaldo Luiz Corrêa
