All of a sudden, like a poet would put it, the bulls have vanished and everyone has turned into a bear. And like in any situation where there is a sudden change in behavior or mood on the market, when it rains , it pours. Or like an ordinary person might say, things can always get worse.
Every bearish piece of news has hit the fan spreading uncertainties for all tastes. And the futures sugar market in NY closed this Friday with March/2017 at 19.12 cents per pound, a 72-point low in the week, almost 16 dollars per ton, still representing a fall since early October, when it reached the 23.90-cent-per-pound peak of exactly 20%.
Now, the market says India will produce over 29 million tons of sugar in the 2017/2018 harvest, which starts in October next year. What is amazing in terms of prediction is that here in the Center-South we can’t have a reasonably clear idea of how big the sugar production, which starts six months earlier for us, will be next year, though we have only 78,000 sugarcane growers. But with India, which has more than 40 million growers, this number is super easy to be measured. It just takes some willingness. I am obviously being ironic.
Markets go overboard on highs and lows. A few months ago when NY was trading at about 12.50 cents per pound, we said this value was too low and pointed out that – based on the fundamental analysis of the market – sugar would trade between 18 and 18.50 cents per pound in the last quarter of 2016. Nobody believed it.
In July, we saw that it would make sense for the mills to buy a put spread financing it with a call sale of 22-23 cents per pound of exercise price. It would have provided an excellent result with the market fall.
Everyone has felt in certain situations that they would rather be wrong and happy than right and sad. Well, we have gone on and on in our weekly comments over this year (actually, since late last year) that the mills ought to focus on pricing in real per ton given that the observed levels had been the highest ever in addition to allowing for a huge profitability due to the production cost. We were absolutely right.
We should point out, however, that there are no reasons for the mills to get discouraged. The closing of the first maturity month for the futures contract in NY on Friday together with the real closing at 3.4730, the highest value since last mid-June, is still equivalent to R$1,525 per ton. Therefore, it’s best not to lose focus. R$1,525 per ton is practically the price average being traded at since May. The yearly average is R$1,432 per ton.
Besides the news from India, Nestle’s announcement about the discovery of a process to decrease 40% in the amount of sugar used in the chocolate without jeorpardizing its taste has been on the news.
In opposition to this wave of bearish news, there is some news that the market doesn’t seem to have taken in. The estimate of sugarcane production in the Center-South for the 2017/2018 harvest is about 565-585 million tons. However, in a conversation with an executive from a company specializing in the analysis of the sugarcane field by satellite images, he showed his concern over what the 2017/2018 might be like according to the analyses they make based on the preliminary data they receive. He bets on a 540-million-ton volume only. If this turns out to be true, the Center-South could have a decrease of more than one million tons in sugar production. Let’s wait and see.
The lack of positive fundamental news on sugar, plus the implacable liquidation of funds and the devaluation of the real against the dollar make up the perfect ingredients for the market to keep on falling. A 20% fall has started to shape a bearish market, according to experts. The fact is that the funds have made a lot of money out of sugar and it is time part of this money was pocketed.
The real devalues not just because of the macro scenario, that is, mainly due to Trump’s election and that the effects the investment plans for infrastructure of the president-elect might speed up the increase in the American interest rate, but mainly by the behavior of the Brazilian Congress, made up mostly of crooks who insist on taking a shameful road and passing measures that will relieve the punishment for their wrongdoings. No wonder Brazil comes fourth – ahead of Venezuela, Bolivia and Chade – on the list of the most corrupt countries, according to the World Economic Forum. It’s hard to do business in such a disgusting environment. Brazil is the only country where crooks want to make a law to put judges behind bars.
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Have a nice weekend.
Arnaldo Luiz Corrêa
