The sugar futures market in NY was excited at Friday’s closing session with prices reaching new highs for July/2016 – 17.29 cents per pound, the highest level since July 2014, when the market was trading at 17.33 per pound.
The non-index funds, greatly responsible for this amazingly strong bullish trend, are at an all-time record long position – now about 270,000 contracts, which is an equivalent volume to the Brazilian sugar exports for a six-month period. The danger, according to some analysts, is that the funds hold nearly 40% of that position. The counter-argument is that other commodities, such as gold and silver, hold a higher percentage. The fact is that they are making money out of this high and under this setting they let will let profits run.
The traditional sugar week in NY, bringing together the leading executives in the sector, mills, refineries, trading companies, analysts and opinion makers on the world market, turned out to be much more constructive in relation to the trajectory of prices of sugar contracts in NY. What we thought would happen along this year, possibly peaking at the start of the last quarter with higher prices, has happened earlier.
Many points that have been discussed over the last past months have become clearer now, especially after several analysts having approved and validated those questions that had been hovering over our heads. One of them is the clear crushing limitation in Brazil and its effect on the future, with no investments, no renewal of the cane fields at the necessary proportion to face a world consumption which has been growing at a greater speed than that Brazil has been able to keep up with. If we compare the yearly average growth of the sugar production in the Center-South over the last five years to the yearly average growth of the world consumption over the same period, we will see it is at 0.4% agaisnt 2%.
Early this year, when the pricing volume by part of the mills in NY reached a record volume (since Archer’s model started monitoring), we warned you that one of the factors that might strengthen the hike in prices was that Brazil had no new sales due to the volume fixed in advance. In the last released number, based on February, the percentage of fixation of the mills reached more than 75%. [Right now we are redesigning our model to separate the fixations per crop year because for the first time we have noticed our number was above that projected /expected by the market and realized that was due to the fact that the present model doesn’t make the distiction between the mentioned periods].
There are other factor which didn’t weigh on the market in the past but now can influence the trajectory of the sugar prices in NY. Temer’s government has been finding out the real rift that PT’s (Workers’ Party) government has left and the Brazilian society doesn’t favor the creation of new taxes. A way out for the government would be bringing back CIDE – tax on fuel – which can bring in R$32 billion per year and narrow the over R$170 billion fiscal rift left by incompetent president Dilma. If there are different tax levels for fuel and ethanol , the sector might benefit, making ethanol more competitive and narrowing the arbitrage with sugar, which right now is trading at more than 400 points of NY equivalent premium over ethanol.
Another exogenous factor which might affect the sector positively is the appointment of competent Pedro Parente to be the president of Petrobras. Parente knows the sugar-alcohol sector very well and his job is to save the state-run oil company. Because of his professionalism and because he knows the market, it wouldn’t be to farfetched to think we can have a gas price that will faithfully reflect the foreign market. This is a crucial point if we are to have foreign investment back in the sugar-alcohol sector. Who will invest in a segment where ethanol pricing, which is responsible for more than 50% of the sugarcane production, is unknown? The introduction of transparency mechanisms into ethanol pricing would have an immediate impact on the raising of new and necessary investments. Brazil will need to crush over 120 million tons of sugarcane until 2020/2021 in order to meet domestic fuel demand and to keep the present market share it has as a leading supplier of sugar to the world.
We might see, with Temer’s government legitimacy, after the definite ousting process of president Dilma Rousseff, the establishment of a long-term energy policy which would provide guidelines and legal security for the investors.
There are other points to be discussed which support an extremely constructive setting for sugar, not only price- but also premium-related. The limited capacity of production distribution via Santos and Paranaguá terminals, which are committed to a substantial volume for the grain harvest, can affect the sugar premiums for delivery through those ports. When the end consumers start realizing how similar this present setting is to that of 2010, we can see an even steeper price hike in NY. Our analysis points to March/2017 at between 20-21 cents per pound.
And we don’t even have to talk about India and Thailand in this weekly comment.
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All those who were in NY have a safe trip back home.
Good week and good businesses everybody.
Arnaldo Luiz Corrêa
