The futures sugar market in NY closed the week at a 49-point fall for May/2016, which closed Friday traded at 14.69 cents per pound – a bright closing if we take into account that it recovered 46 points at the session on the same day after having been traded at 14.23 cents per pound. Could there be a reversal? The situation is still confusing. It turns out that, as we said last week, the long position of the funds had shown that they were even longer on a downward market, creating an amazing volume of settlement of positions which led the sugar market in NY to the 14.23-cent-per-pound level, a devaluation which accumulated a 250-point low in only 11 sessions and 95 points only at the last one.
However, from the position of the funds released on Friday, based on the business done until the previous Tuesday, they continue long at 206,000 lots. I believe this number shows the futures market in NY will still be susceptible to oscillations which happened according to exogenous factors (oil, real, political crisis) and to the amount of crushing and pressure for cash at the start of this harvest. Buckle up because volatility should increase, mainly due to the fact that next week May options will mature. Open positions of options at exercise prices closest to the market run the exercise risk – the ones from 13.50 to 14.50 cents per pound for the puts and the ones from 15.00 to 16.00 cents per pound for calls. They come to 42,000 for puts and 40,000 for calls. This should be a “fun” week.
The price drop in May is because the market felt the blow a trader from a mill had called “the black swan of ethanol”, that is, nobody could have imagined that hydrous prices would plummet as fast and as hugely as they did. In three weeks hydrous ethanol went from R$1.9500 to R$1.6000, while the price barely changed at the pump. Distributors and retailers are the ones making a lot of money out of ethanol. The gross difference between pump price and the ESALQ index reached its peak on April 2, according to a multinational trader – R$1.1000 per liter. The gross margin of the distributor has reached a record of more than R$0.7000 per liter. The gas station keeps R$0.4000 per liter. And the producer are left high and dry.
The government tried but didn’t manage to drive gas price down in another effort to fool the unsuspecting ones who still believe in this bunch of creeps in power. They argued the price is above that of the foreign market. It is even worse when the media buys into that theory.
There is a lack of information on the market as to the gas price in Brazil compared to the foreign price. A TV news program has said that gas in Brazil is 40% more expensive than the foreign price. I have no idea where these guys get hold of this information.
We can check two sources – first the price at the refinery, which is imported gas price plus product freight and admission costs, before taxes. Today this value is at R$1.5370 per liter while the foreign market shows R$1.5030 per liter. That is, the price is 2% above that of the foreign market at the most – keeping in mind that this value is free of tax, freight to refinery, resale margin, etc. The second is compare average gas price on the foreign market to the value to the consumer at the gas station. Today this value is at US$ 0.99 per liter, that is, R$3.66 per liter, pretty much in line with the market. So, I don’t know where this so talked-about gap comes from.
The sugar physical market for exports is still very weak, especially for the VHP. The spreads – thermometers which show how worried the market is about the immediate availability of the product – show confidence there will be sugar for everybody. May/July, July/October and October/March spreads show a 6-8% carry in dollars, that is, those who buy now will get more discounts.
According to MB Associates, in a newsletter released last week, even if the impeachment doesn’t go through, a Dilma-Lula government isn’t viable for at least two reasons: first, it is hard to imagine a peaceful coexistence between a powerless president and an actual ostensive president; secondly, because in order to hold back the impeachment, negotiator Lula is promising a left government to the left, a significant increase in public expenditure for the physiological political groups and will surely try to sell Brazilians a 2016-version letter for the GDP. Under the current crisis and total exhaustion of the National Treasury, that is an impossible task. The impeachment score according to O ESTADÃO newspaper is 277 to 114. There are 62 undecided and 60 who didn’t respond to the poll. Two didn’t show up to vote, for they are on a medical leave. So, 65 votes are needed out of the 120 available ones, a little over 50%. Dilma will fall.
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Have a nice week everybody.
Arnaldo Luiz Corrêa
