Those who were surprised by the performance of the futures sugar market in NY when the curtains closed at this Friday’s session hadn’t noticed the signs the market had been giving for a long time over the last months and that now have come true under our noses. The market responded very violently over a shorter period of time. This is called panic. The traded volume was 335,000 contract on Friday. Remember last week when we talked about the weak trading volume in July and August? September is at a daily average volume of 220,000 lots, or 160% over the average of the two previous months. Do you think that’s a coincidence?
Do you know how much the sugar market in NY was at a year ago? 11.47 cents per pound – 90% increase in twelve months.
When we released our forecast on sugarcane production for the 2016/2017 harvest in the Center-South in January this year, it showed 618.5 million tons of sugarcane while the average forecast going around on the market was between 622 and 644 million tons. Only now does the market seem to realize Brazil will produce a lot less sugarcane than what was thought earlier. Yield has dropped dramatically over the last two weeks and the market has taken on the role of a runaway train, without brakes, bringing with it all those who were short sold, or waiting on profit taking to cover themselves, or praying for the funds to dump a huge long position they have on the market.
Even the rocks know the mills were practically fixed on the total volume of the 2016/2017 harvest, maybe with still some outstanding volume to be fixed against March/2017 and starting, though still low percetange-wise, the fixations in real for 2017/2018.
Let’s wait to see the consequences Friday’s stampede, in which the futures sugar contract in NY for October/2016 closed the session at 21.78 cents per pound, after having hit 22.20 cents per pound, increasing almost 180 points in the week (39.50 dollars per ton), will bring to the futures market over the next days. NY has reached the highest price level since August 2012. It’s also the last time the market has had a daily 6% variation – that was in April this year. And in February, we had a larger variation than the 130-point variation seen this Friday.
First, the trading companies, as well as the suppliers of structured OTC operations will face a huge margin call on Monday, estimated at US$300 million. Rumors on this side of the business aren’t that good. A margin call is money taken from the vein and makes trading companies more selective and restrictive at the opening of the fixation window for the 2017/2018 harvest. Secondly, but not least, is the warning sign which comes from the fact that with less sugar production than what was expected, some mills can have difficulty fulfilling their sugar delivery commitments entirely, a lot of which are already fixed. And then the trading company “scratches its head” if, in addition to the margin call which bleeds its cash flow, it also runs the risk of having to face a default due to the lack of product. Third, the volatility of the options has gone up strongly (from 2% to 4%), possibly pointing to a calls buy in order to face up to the short futures and the decrease of the impact on the margin calls. Things are dire!
Simulating the closing of the sugar market in NY on Friday with an eventual NDF, March/2017 shows R$1,738 per FOB ton. A price that couldn’t be in minds of the most optimistic mill owners even in their rosiest dreams. What can we do, huh? I believe the market in cents per pound will continue to go up to the 24-cent-per-pound level (we have said that here again and again) but when it comes to real per ton, I believe it’s about something else. It’s an excellent price and should the difference in returns between sugar and ethanol (with 700 points of discount against NY sugar) continue, it is clear that next year we will see the mills testing at the limit of their capacity of sugar production. Don’t lose your focus and don’t let panic get in your way even if you know that the biggest individual buyer of Brazilian sugar will land here next week.
The Brazilian Ministry of Agriculture, Livestock and Food Supply really lacks someone as important as Professor Roberto Rodrigues, an agronomist and expert not only on Brazilian agriculture issues but mainly on the sugar-alcohol sector. He is a great speaker, an attentive listener. He is respectful and respected by everyone on the agribusiness segment – a gentleman and a rare man nowadays. While we don’t have a politician this competent, we have to keep on swallowing Minister Blairo Maggi, who had the courage to say that subsidies on the sugar-alcohol sector attracts incompetent people. The distinguished Minister said, “in order to have efficienty with ethanol, a lot of sugarcane – 100-120 tons per hectare – has to be produced, and these companies (he was referring to the mills) have lost productivity and instead of 100 tons produce 60 tons”. The Minister didn’t say where this subsidy he mentions is. If it exists or existed is anyone’s guess. What is known – and very well known, as proven by the debt the mills are in – is that the so-called incompetence he refers to must be deeply rooted in the thirteen years of PT (Workers’ Party) ruling (which he supported for twelve years, by the way) and which sank the sugar-alcohol sector, especially with the subsidies on gas, creating losses (by our calculations) of R$100 billion only over the years the incompetent impeached president Dilma Rousseff was in office. He is wise who speaks little – give us a break, Minister.
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Have a nice weekend.
Arnaldo Luiz Corrêa
