The sugar market in NY closed the week at a 10-dollar-a-ton high for March/2016, which closed at 15.07 cents a pound. The other trading months closed between 7.50- and 10-dollar-a-ton highs. I don’t see this market being strong enough to continue its vigorous high trend since the funds have been the leading factors and the physical market is still apathetic and divorced from the futures market. We can’t forget that ever since the minimum 10.13 cents a pound traded in NY on August 24, the market has gone up to 15.85 cents a pound on December 4, that is, more than 55% in a little more than three months. In real, the hike has been 61%.
Now the market is flooded with the various predictions about the global sugar deficit, which come to the overwhelming 8.2 million tons. Other more conservative trading companies are working with a little more than 2 million for 2015/2016 (don’t forget that when we talk about global sugar year, it starts in October 2015 and ends in September 2016). Anyway, people wonder whether these numbers are properly reflected on the sugar price traded in NY. A point to be looked at is the weakness of the March/May spread, which after having traded at 51 points fell to 36 points. This is the first sign that maybe the trading companies are beginning to throw in the towel hoping for a more respondent physical market and, therefore, paying premiums for shorter maturities. It has been getting weaker.
The political and economical situation in Brazil is truly chaotic, with the country watching the loss of its investment grade and heading for an inflation rate increase and exchange rate volatility. The interval between the real predictions is also frightening. There are people betting on up to R$5 to the dollar, which would be an absolutely stressful situation.
Using the old cliche that says opportunities come out of crises, today the mills fear to continue to fix prices for the 2015/2016 crop and even more for 2017/2018 because they believe that the margin call from the selling of NDF of the dollar can bleed the cash flow. The calculations made by an executive in the sector sums up the problem well: considering that May/2016 closed the equivalent to R$1,380 a ton, and assuming that the average price of fixation for the 2015/2016 crop, according to the Archer’s model, is R$1,170 a ton, and the fixed percentage – according to the same executive – should be at about 60%, the margin call total that mills/trading companies have had should be close to R$2.7 billion right now (USD 700 million). In the case of the mills, the cash flow is bleeding a lot, and for the trading companies, it restricts the availability of immediate fixation for the clients even further. Could there be a bigger stress if the market suffers another rally (price hike)?
Right now, I believe the biggest concern on the sugar market is not so much the devaluation of the real against the dollar as it is the price of the oil barrel on the global market. As the economist José Roberto Mendonça de Barros, MB Associates, has put it, “As soon as the commercial restrictions have been lifted, Iran will export everything it can produce, and the current oil surplus situation on the foreign market will worsen. That’s why the price of the product is pointing to a number lower than US$40.00 a barrel.”
We can’t ignore that more than half of the crushed sugarcane is for the production of ethanol, whose price depends on the parity with gas which has prices administered by the government. That is, the ceiling price for hydrous selling will always be limited to 70% of the gas price at the pump. If oil slips on the foreign market, the mill will take the hardest fall, losing competitiveness and directing more sugarcane to the production of sugar.
Next year we should already have a change in the production mix, increasing the participation of sugar by another 2 percentage points against 2015/2016. This represents an increase in the sugar availability to another 3.4 million tons, that is, a good deal of the so-called global deficit.
So we suggest maximizing whatever can be maximized. A sugar fixing for May/2017, for example, settles the equivalent of R$1,530 a ton, a very appealing price even if the fact that Brazil already has a 2-digit inflation rate is put into the equation. If the dollar goes up to R$5,0000 on that maturity, the sugar for May/2017 will need to be at least at 13.34 cents a pound so we can reach the same R$1,530. If we are reasonable and think that in May/2017 the American currency can be worth R$4,0000, the balance point goes up to 16.67 cents a pound, more than 200 points over Friday’s closing. If, on the other hand, the political crisis is worked out and the country recovers its credibility abroad, the dollar can go back to the 3.500 level, which would put the balance point in NY at 19 cents a pound. It looks like the risk of this operation is limited; in addition, if the company doesn’t fell comfortable, it can buy calls at an exercise price close to the balance levels, taking part in an eventual rally which can happen in the price in dollar.
—-
It’s unbelievable we still find people who are willing to support the present government. To defend the Workers’s Party (PT), true cancer which has settled into the core of the Brazilian politics, you have to fit into one of these categories: alienated, tamed, stupid, or a protégé. Brazil needs to get rid of this gang of crooks, tramps, corrupt, swindlers and thieves.
Please put it on your 2016 calendar – the Night Course on Options will take place on February 22, 23, 24 and 25 in São Paulo, and on March 29, 30 and 31, we will have the XXV Intensive Course on Futures, Options and Derivatives in Agricultural Commodities.
If you want to get our weekly comments straight through you email, just register at our site by logging onto https://archerconsulting.com.br/cadastro/.
I would like to wish all our clients, readers, suppliers and staff a MERRY CHRISTMAS and a PROSPEROUS 2016. Thanks so much for your support.
THIS IS THE LAST REPORT OF THE YEAR. WE WILL BE BACK ON FEBRUARY 13, 2016.
Arnaldo Luiz Corrêa
