The sugar market in NY closed the shorter week due to the Thanksgiving Holiday in the United States with another fall against last Friday. March/2017 closed at 19.86 cents per pound, a slightly over 6-dollar-per-ton fall in the week. All the other trading months at the exchange closed with falls between 5 and 7 dollars per ton.
I find it that it is getting harder and harder for us to be able to see sugar prices at the high levels in real per ton that we saw up until early October, when the market reached R$1,761.89 (a combination of a dollar rate at 3.2212 and sugar in NY at 23.81 cents per pound). With this Friday’s closing at 19.86 cents per pound and the dollar trading at 3.4140, we come to R$1,557.56 – an 11.60% fall. The real devaluation against the dollar gets hit by a combination of global uncertainties due to Donald Trump’s election and the Brazilian political scene with yet another minister’s downfall charged with patronizing. Oil plummeting on the foreign market doesn’t help the ethanol-sugar arbitrage either, that is, regardless of the size of next year’s harvest, more sugar will be produced.
Fuel consumption in Brazil, according to numbers released by ANP, has been 57.66 billion liters over the last twelve months – a 1.4 billion liter fall. For equivalent gas, the fall has been 1.48% over the same period and we are foreseeing the year will close out with a 1.58% fall.
The sector has to promote some urgent wide-ranging discussion about the efficacy of the Consecana. There is no doubt that the model has been unquestionably successful since it was created. However, models are not perfect and need to be adjusted and improved in order to adapt to the reality of an ever-changing market and world. For a long time, Consecana seemed to reflect the sector’s expectations and define in a fair manner the payments of the sugarcane growers. It did its job under certain market conditions, but it is undeniable that today the model jeopardizes not only the mills but also the sugacane growers themselves when these conditions change, which is what is happening now when the sugar world has gone from a global surplus to a deficit.
The restrictions which the current model shows on inverted markets, those whose prices in months with shorter maturity traded on the futures market are higher than the prices in months with longer maturities, need to be analyzed in all seriouness. That is the case now.
For instance, a few weeks ago the futures sugar contract for May/2017 at the NY exchange, first pricing month for the sugar of the 2017/2018 harvest, was trading at 23.00 cents per pound. The risk policy of most mills strongly recommends that the percentage of the corresponding sugar production from third parties’ sugarcane not be fixed. The argument is that by fixing the sugar price corresponding to the sugarcane production of third parties on the futures market , the mill runs the risk of seeing the market continue rising, and the adjusted cost of the sugarcane it will have to pay for the cane grower affect the profitability of the end product (sugar). So, by following this recommendation, the mill saw May/2017 trade at 23.00 cents per pound without fixing anything corresponding to the sugarcane of the growers. This procedure has become almost like a principle within the mills. There is no math explanation that can justify that losing 400 points – or 90 dollars per ton!!! – (May is at 19.10 cents per pound) doesn’t make a difference for the mill or for the sugarcane growers. They have both lost.
The logic of not fixing sugarcane of third parties works on the cash and carry market (where the future prices with longer maturity are higher than those with shorter maturity) common in situations with oversupply. However, using this same criterion on an inverted market is like throwing out of the window a possible opportunity of a more profitable payment than that the months with shorter maturity provide on an inverted market. I just can’t understand this logic.
How to solve this question so that everyone can win is the greatest challenge which assures us that there must be a wide-ranging debate on it. Maybe there should be a futures ATR contract at the BM&F Bovespa or a fairer model which hinders the mill from making money when the futures market rises just because it has third parties’ sugarcane. We have to be humble enough to recognize we need to perfect the sugarcane pricing tools so that the sector as a whole can take advantage of the rare situations such as the one we have here now, with sugar trading at a much higher margin than the one we have seen in recent years.
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Have a nice weekend.
Arnaldo Luiz Corrêa
