On the long and winding road which leads us to the start of the next harvest in the Center-South – in May 2017 – the major hurdle the market comes up against is to know how much higher sugar prices will go on the futures in NY.
A lot of participants at the Sugar Dinner in London last Thursday bring back home to their countries the feeling that sugar prices on the futures market in NY still haven’t stressed in all its intensity the lack of raw material (sugarcane) which seems to set the tone to the market mood in the months ahead.
It is still early to predict the 2017/2018 harvest , but there is reasonable consensus that it should be below the current harvest and that more sugar should be produced with the financial resources the mills and distilleries have been investing to increase the sugar production capacity. With hydrous and anhydrous selling for prices which are equivalent to crude sugar price at the exchange traded at 600-700 point discounts against NY, an easy calculation shows that the investment will pay itself off in less than 24 months.
The below-average cane field renewal, the smallest sugarcane yield due to the climate and the average aging of the harvest put the number of tons the Center-South will crush next from next year on in jeopardy. Will it be less than 600 million tons?
So, it all seems to point to higher prices in NY, right? Sugar fundamentals are still going strong. There isn’t a single soul who believed that by mid-April 2016 (sugar at 15 cents per pound) the market could have gotten to where it did. At that point in time, we said we believed March/2017 could reach 18 cents per pound. We were sent funny emails calling us “the last bulls still alive”. So, 18 cents per pound today would be the ultimate dream of those trading companies which kept going against the market hike trend and large buyers who devotedly believed they would buy raw sugar at 11 cents per pound a few months later (today they can buy half that).
Now, a strong 800-point hike later, everyone has turned bullish and it has become easier to hunt Pokémon on Trafalgar Square than run into a bearish factor for this market.
Looking at it with the exemption and discipline which have always guided my strategic decision-making process, I have learned that nobody goes bust when they are making a profit. A large number of Center-South mills , with a huge management capacity, carry a cost of sugar production at around 13.25 cents per pound ex-mill – financial cost-free. Roughly speaking, this amounts to R$1,000-R$1,050 per ton FOB Santos cost vis-á-vis Friday’s closing price of R$1,700 per ton. One cannot say that someone won’t fix their price at such level.
The exceptions are the mills with debts in US dollars. Undoubtedly, those should wait because prices in cents per pound might go up. But those companies which think in real per ton should not fall in love with the market . What I mean is that with the improvement in the political setting and in the economic perspectives and the resulting foreign capital inflow, chances are that the real will appreciate against the dollar. March/2017 closing today, traded at 23.42 cents per pound and with the real trading at 3.2260, puts the fixation in real at R$1,736 per ton (though there is still some basis risk). Should the real appreciate up to 3.1000 for the next year, based on the maturity months of May, July, and October at the exchange – so that the mill can have the same fixation level in real – these maturity months , whose closing levels this Friday were 22.63, 21.82 and 21. 19 cents per pound, respectively, will have to appreciate by 175, 250 and 325 points.
Is this bullish or bearish? Look, the values in cents per pound would, in theory, have to go up just to provide the same level in real per ton. This puts a ceiling on the fixation in real per ton, or at least makes it less flexible. In short, the sugar market is bullish in cents per pound and from neutral to a little bullish in real per ton.
The ethanol to be produced in the Center-South next year won’t be enough to meet the fuel demand (Otto cycle) which we foresee for 2017 – especially if Petrobras lowers fuel prices in order to balance the internal prices out with those on the foreign market. Ethanol will have to go up from the current discounts to meet the sugar production increase on the part of the mills next year. That is , I believe if there are meaningful price changes, they won’t come from an increase in sugar price in real per ton but from a meaningful improvement in internal ethanol price.
If oil price drops below 50 dollars per barrel, the above-mentioned structure will change.
City elections in Brazil last week shows the level of dissatisfaction among Brazilians with the criminal organization that was in office for 13 years. The Workers’ Party lost 60% of the city hall it held. It is estimated that the party will lose 50,000 jobs starting January 2017. Fifty thousand people who never worked will add to the unemployed group. Little by little South America is wiping out these communists.
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Enjoy your weekend.
Arnaldo Luiz Corrêa
