This week’s business agenda was pretty hectic due to the several events held in São Paulo over the Sugar Week and the Gala Dinner sponsored by the Sugar Club. The sugar-alcohol world was in town and there was no truce to the fertile discussions of ideas and future perspectives be it during the Datagro Conference or at the other events which swamped the week. The general feeling seemed to be more constructive. The interlocutors took great pains not to come off too bullish especially because the political and fiscal scenario in Brazil discourage such attitude due to the volatility of the Brazilian currency which has come to trade at astonishing 4.2500. The feeling of a constructive scenario takes into account that sugar and ethanol will be very sensitive to the arbitrage in the following months.
The dollar surge sped up the pricing for export sugar in real for the 2016/2017 and also for the 2017/2018 harvests. Although structured operations such as these demand credit and competent risk management, more and more mills are taking the opportunity and locking the profitability of sugar sales for the next years. This would be a great opportunity for the banks to bring the sector companies (which are their clients) facing cash flow problems to them, providing them with a better profitability on their sugar sales and assuring they will be able to pay off their debts. Better than stepping on the oxygen tube or cutting off credit once and for all, the structuring of operations in real per ton can work for the banks like an insurance policy on the creditor fulfilling his obligations because he has an advantageous fixed sale in real in the hands of the banks.
The futures sugar contract in the NY exchange closed this Friday’s session showing a substantial appreciation for October/2015 (expiring next week), which increased 78 points in the week (17 dollars per ton), quoted at 11.74 cents per pound. The inverse correlation sugar had with the dollar in NY disappeared. The fundamentals start to speak louder from now on.
The huge volume of sugar price fixing for export in the context of a stronger dollar starts to outline a more “sugary” harvest for 2016/2017. The March/May 2016 spread, however, starts to narrow, having gone from 10-15 points of discount to 10 points of March premium against May. The market seems to believe that there might be some delay at the start of the next harvest in the Center-South, or that the long off-season period after the October/2015 contract’s maturity next week, inhibits those sold from keeping their positions and preferred to roll them over to May/2016 in order to avoid surprises. For now, there are only conjectures, but it seems like we have already seen the low on the sugar market.
The fact that the accumulated crushed sugar in the Center-South up until the first half of September has been lower than that over the last two years turns up a yellow light. 403.8 million tons have been crushed against 412.6 tons in 2014/2015 and 408.5 million in 2013/2014. I wonder if we will reach the 590 million tons which many have foreseen. Our number is still 581.2 million tons although the current performance of crushing in view of what happened in the past can also decrease our estimate.
Just as a reminder of some points that have been thoroughly commented on and analyzed here: we have said that the purchase of the October/2015-March/2016 spread at exorbitant 28-35% a year, under which it was being traded at, was like taking a cookie from a kid. The spread closed Friday at 67 points, while in early June it was being traded at 133 points. That is, there has been an appreciation of more than 14 dollar per ton over the period! We has also insisted on saying that the FOB value for sugar in real per ton should always be watched and have mentioned that over the last three years the average had been R$880 per ton and, therefore, it wouldn’t make sense to set prices below that level. Last but not least, we have said that in October we would start seeing some price recovery in NY. Let’s see if we will hit the nail on the head again.
We do not have a crystal Ball, but our analysis are consistent and in line with the market fundamentals. We do not sell structures nor are we affiliated to any brokerage or bank. Nor do we receive any kind of commission on structures or recommendations we might make. We are independent and, for that reason, our opinion isn’t dependent on our interlocutors. We don’t make up stories to please our readers.
The Sugar Gala Dinner sponsored by the Sugar Club last week has been one of the greatest in the last decades. The political context Brazil is in, appalling its good citizens because of the magnitude of robbery schemes, corruption and disregard sponsored by a party which has never had a government project, but a “scam to stay in power”, using Celso Mello’s words, Supreme Court Minister, was the fuel for a tough and memorable speech made by the President of the Sugar Club, Paulo Roberto Garcia, at the opening of the Gala Dinner. Paulo referred to the “men in the sugar-alcohol industry who insist on not giving up on Brazil, even when ethical and moral principles, which should rule the life of our nation, are failing” as being “headstrong”. I couldn’t agree more!
You all have a great weekend and I hope everybody has made it back home safely.
Arnaldo Luiz Corrêa
