The uncertainty on the kind of administration the White House will have starting next January with the astounding election of the Republican candidate Donald Trump caused a wave of devaluations of assets around the world and the real suffered the largest fall over a three-day interval (from Wednesday to Friday) since the 2008 crisis in October when the devaluation hit more than 12.5%. The American currency was trading at R$3.4987 last Friday against a R$3.1669 closing three days ago – a 9.48% devaluation.
Because some banks were betting on the real appreciation until the end of the year due to the Brazilian fiscal adjustment and the possibility of a larger flow of foreign investments, it wouldn’t be surprising if the exchange rate volatility were tied to the coverage of these short positions. The same panic in 2008, in the midst of the world financial crisis, fell apart a couple of weeks later after that peak.
Markets overreact both at highs and at lows. I always remember the case of a fund manager stationed in Asia who proudly claimed, right after the sugar contract in NY having traded at robust 36 cents per pound in February 2011, we were heading towards rapid 60 cents per pound, validated by analyst Jim Rogers who foresaw 75 cents per pound. Those who bought into that then paid a high price.
This is an amazing opportunity for the sugar-alcohol sector to fix prices in real along the futures curve in NY together with the NDF (non-deliverable forward). These are temporary instabilities. We have been through other situations of volatility before and we will see others in the future. Cold blood, discipline, and focus are necessary to get the most out of this crisis. At some point on Friday, the value in real per ton for the first maturity month of the sugar in NY reached R$1,730 and closed the session at the agreed price of R$1,696. It’s no use trying to hit the eye of the fly while it is flying. But one can see there is selling pressure, or at least, consultations with providers of this kind of operation when the obtained value is close to this price range.
Well, sugar closed the week with a futures contract for March/2017 trading at 21.70 cents per pound, a slight negative 3-point fluctuation against the previous Friday. However, the maturity months starting in May 2018 closed with 50-60 point falls, or 10 and 13 dollars per ton.
With the huge gap between what Brazil needs to produce to meet the potential fuel demand and the increase in the sugar consumption in the world (depending on 50% on Brazilian sugar) , projecting the next five years, it seems hard to imagine we will be able to add at least 125 million tons of sugar to 2021/2022 only to meet the ethanol fuel demand. Will hydrous end? Will we import corn ethanol? Or will we have more gas to meet the internal consumption? Seven years ago, hydrous ethanol was responsible for 31.2% of the Otto cycle consumption. Today, it accounts for 20.9% – a yearly shrinkage of 5.6%. Where does the sector see itself 10 years from now?
Based on our estimates, we should close the year with a total gas consumption equivalent to 53. 2 billion liters, a 0.75% downturn against 2015. It fell slightly compared to the GPD and people’s income.
The fifth pricing estimate of the mills on the futures sugar market in NY for the 2017/2018 harvest shows, according to the model developed by Archer Consulting, that up until late October 2016 a little over 8 million tons had already been fixed (30.6% of the estimated exports). The average registered price was 17.21 cents per pound. In previous harvests , the maximum percentage of accumulated fixation up until October was 25% in 2014/2015. Remunerated prices encourage mills to anticipate their fixations. The percentage isn’t higher due to a large number of mills which aren’t able to fix prices because of the credit crunch. The average adjusted value of fixation, taking into account the NDFs is estimated at R$1.544,96 per ton, or 67.25 cents per pound, without polarization premium.
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Have a nice and restful weekend.
Arnaldo Luiz Corrêa
