The futures sugar market in NY closed this Friday with March/2017 at 22.71 cents per pound – a 20-point fall (4.40 dollars per ton) against last Friday. The futures market dropped pretty much linearly with longer maturities depreciating between one and four dollars per ton in the weekly accumulated. The funds reduced their long position a little, and according to the report based on October 18, they have 327,000 lots.
Friday’s closing was at R$1,649 per ton, a R$113 fall per ton against the maximum price traded so far in March, which occurred two weeks ago. We should pay attention to three important factors that can hinder the sugar price hike in real per ton. The first factor is the real appreciation against the dollar driven by a more optimistic domestic political and economic scenario; the second factor is the fall in interest rates in Brazil with a downward bias and the third factor is the possible increase in the American interest rates. Under this probable scenario, we will see a smaller spread between the two rates that interfere with the real curve the banks are offering for NDF operations, that is, for longer maturities on the price curve until March/2018, the average values are at about R$1,680 per ton, well below the level they were at two weeks ago.
The physical export market shows the end consumer is in no hurry to buy sugar. The discount level for October shipment this week, according to a physical broker, was 95 points, while for November it was 105 points (a wash-out occurred in the week). Physical and futures markets that pull away from the parallelism needed for mutual validation suffer from double vision which may cause someone to hit his head against a wall.
We overheard some astounding stories over coffee breaks during the 16th DATAGRO International Conference on Sugar and Ethanol last week in São Paulo. Companies admitted having compromised all, or in some cases, over 100% of their sugar export volumes fixing prices in structured over the counter operations which seem more like to be designed to hang them rather than help them breathe. Evidently, nobody agreed to do this type of operation because they had a gun pointed to their heads, but there should be some ethics on the part of those who offer these operations and understanding what derivatives are on the part of those buying them has to be a must. If we believe what we hear, it looks like the abovementioned suppositions find no support in real life. But at the end of the day, regardless of who is right, the mill, which still believes in the Easter Bunny or the Tooth Fairy, will pick up the future bill.
As I have said here many times before, having worked for a company (Copersucar) which pioneered and had a leading role in Brazil in the use of these protection tools against negative price fluctuations, I have nothing against over the counter operations. The problem occurs when a company uses this mode beyond the appropriate limit for its fixation volume, intoxicated by the melodic singing of the mermaid or the free lunch fallacy. Or, even worse, when it is known that the doctor it goes to is the doctor who owns the drugstore where it buys the medicine prescribed by that doctor. Now, sit down on the curb and cry.
Badly structured operations have a ripple effect on the market , hidden behind a haze of astonishment and anger. Taken aback by the double volume they had estimated to fix, the mills end up turning to the trading companies in order to roll over their futures positions or even their physical positions, contaminating not only its own risk and credit but also that of the sector as a whole. It is imperative that the companies understand how the derivative market works before they jump into operations they aren’t familiar with at all and jeopardize their own longevity.
In my opinion, the highlight of the abovementioned conference was the courageous words of Jucelino Oliveira de Sousa, President-Director of the Coruripe Group. Comparing the previous panel speakers to a medical joint that knows the sector issues and sympathizes with them, Sousa played the role , as an executive for a large group, of the sick patient who – according to his words – isn’t even in the ICU due to a lack of beds. He spoke harshly about the hardships the sector has been through over the last years, which are “a lot worse than the numbers and graphs can mirror”. Despite the current good prices , they “won’t be enough to settle the liabilities created over the last years and let alone to encourage investments to come back”. He pointed out the fact that the sugar-alcohol sector is “the one that has least evolved in productivity in the last years”. Finally, still firmly, he put his finger on the problem we are all aware of – the lack of adequate communication with the society and the threats ahead, such as the possible diesel release for passenger cars, the return of PIS/Cofins on hydrous in January and the law bill in Minas Gerais to increase the ICMS on ethanol. Sousa wrapped it up by pointing out the restriction or the disappearance of agricultural credit funding which puts the needed expansion of planted areas at risk. He urged the government , the organized society, and the entrepreneurs to debate on the situation of the sector, discuss solutions and plan short, medium and long-term actions.
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Enjoy your weekend.
Arnaldo Luiz Corrêa
