Summer vacation in the northern hemisphere and school vacation in Brazil are perfect ingredients to make for a very quiet and news-deprived market which encourages analysts to look over their glasses. So, the sugar futures market in NY closed practically unchanged in the week. October/2016 closed Friday at 19.59 cents per pound with an anemic 2-point fluctuation against the previous Friday.
The export physical market is inert while spreads on the futures market show no sign that there is any concern about the sugar availability in the Center-South for now. The keeping of the huge long position of funds, which liquidated only 12,000 lots in the week on a market which seems to be consolidating itself, is truly uncertain. There are some wild guesses.
A commodity analyst from NY has made a comment about a recent correlation between the sugar and the coffee markets. On the latter market, the funds have “found” themselves increasing the long position while the market falls. Then, there was an avalanche of long liquidation on the part of the funds this Friday. Will sugar be contaminated by the behavior of the funds as well?
There is no betting on this, for on the sugar market the trading companies are still covering their short positions by licking their wounds. That is, when funds sell (liquidating and profit taking), they find eager buyers.
The fall in the oil barrel price on the foreign market is not encouraging news for the sugar-alcohol sector. After having been traded in early June at the highest price since November last year, when it reached 52 dollars, the barrel price has plummeted and is being traded at 44 dollars. This value, if projected into the next months, and still considering that the real should appreciate against the dollar with the definite ousting of president Dilma Roussef, projects gas C liter (with 27% of anhydrous) for the consumer at R$2.8250 per liter and the hydrous at R$1.9800. That is, at this value we will have a sugar production close to the threshold of the crystallization capacity of the Center-South.
In other words, I believe there is a ceiling for the sugar price in NY around 22.50-23.75 cents per pound which can be reduced if oil continues being pressured. If the target price is in real, the chance of a R$1,600 fixation per ton being a “bad fixation” is small.
Oil price right now is one of the most critical points in the analysis that can be made for the mid-term. Sugar fundamentals are still very solid for the mid- and long-terms based on the correct perception that the sugarcane field growth for 2017/2018 is jeopardized due to the lack of investment while the world consumption grows at a faster pace than that the world production can keep up with.
On the other hand, the huge gap that gas price projects into the end of the year allows the government to introduce CIDE (the Contribution of Intervention inthe Economic Domain, also know as Oil Tax) without impacting Petrobras cash flow, neutralizing this gap (gas A at the pump – average price in SP – is about 20% more than that of the foreign market price).
Some numbers on the Center-South crushing are being revised downward. Although we are still halfway through the crushing period, numbers close to 600-610 million tons can neutralize or be a setback on the oil issue.
No one can say that 2016 hasn’t been filled with strong emotions. And there are still 162 days to go before it is over.
Put it down on your calendar – registrations for the 26th Intensive Course on Futures, Options and Agricultural Derivatives to be held on September 27, 28 and 29, 2016 from 9:00 am to 5:00 pm in São Paulo, SP are open. For further information, contact priscilla@archerconsulting.com.br.
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Have all a great weekend.
Arnaldo Luiz Correa
