The futures sugar market in NY closed Friday with March/2017 at 19.24 cents per pound – only a 12-point high against the previous week. The other maturity months closed just about unchanged. It was such a slow week for the market that according to a broker in NY watching ice melt looked a lot more exciting.
The bears are counting their chickens before they hatch. Reports that show sugar will have a global surplus in two years and that India will produce 29 million tons and so on have been popping up here and there. Let’s wait and see, folks! January and February are usually key months and seasonably show peak prices. We believe it will be less likely to see prices above 24 cents per pound; however, we’d better stay tuned to the start of the 2017/2018 harvest. The cane fields have grown old and worn-out, with a smaller crop, a lack of investment and, last but not least, an increasing number of researchers having stated that next year’s harvest will be smaller than 550 million tons. It might be worth buying an out-of-the-money call which will be highly valued if prices go up together with volatility. On the flip side, the funds have made a lot of money from sugar this year and might as well get out of their remaining position and put money into other markets signaling a higher appreciation.
Speaking of funds, the two main soft commodities – coffee and sugar – have fallen considerably over the last weeks. The funds were pretty long on both so they must have decided in an orchestrated manner to pocket the profit and move on to another challenge – maybe oil.
The transparency policy on fuel pricing introduced by Petrobras under Pedro Parente’s administration has been slowly showing signs of its importance. Gas price for the consumer has closely been following the variations of the commodity on the foreign market and its corresponding value in real. The market will pretty soon realize that this attitude on Petrobras part will bear fruit on the sugar-alcohol sector, for ethanol will be more competitive and the arbitrage with sugar narrower. There is still a long way to go before ethanol turns into a commodity in the true sense of the term, but a thousand-kilometer walk starts out with a first step. The average gas price at the pump , in 100 consumer countries, is US$0.99 per liter. In Brazil, a fair gas price at the pump should be R$3.1664 per liter.
Brazil should import ethanol next year since its projected supply and demand accounts don’t add up.
If you are brave enough, a strategy that can be a good alternative to buyers and sellers is the straddle, which is an operation where a call and a put at the same exercise price are sold at the same time. If we take the exercise price of 18.50 cents per pound in May/2017, we will capture about 220 points of premium. At maturity, you will be either 16.30-cent-per-pound long or 20.70-cent-per-pound short. That’s fully manageable. You just have to be on good terms with your financial director.
We have gotten a lot of emails backing up the idea that Consecana needs a wide-ranging change. One of the readers suggested that “the mill could make pricing related to the VHP available to the sugarcane grower. For example, a grower with 100,000 tons of sugarcane could fix 28,000 against the NY screen for the current month, just like the futures exchange rate”. Remember that 28% is the percentage of sugarcane produced in the Center-South for export.
The sixth estimate of export pricing by the mills on the futures sugar market in NY for the 2017/2018 harvest shows, according to the model developed by Archer Consulting, that by the end of 2016 a little over 9.4 million tons had already been fixed (35.6% of the estimated exports). The average price was 17.34 cents per pound. The average adjusted fixing value , taking into account the NDFs (non-deliverable forward) is estimated at R$1,548.49 per ton, or 67.41 cents per pound, with pol.
An executive from the sector was giving an interview to a journalist from a big media vehicle, and when asked what he thought about the 29-million-ton-of-sugar harvest expected for India next year, he came back with, “Here at my company, where we treat sugacane as if it were bonsai and even so we get our predictions wrong, trusting such a prediction – made so far in advance – about India, where there are some producers who deliver sugarcane by bike, is out of the question”. The journalist stopped writing.
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Have a nice weekend.
Arnaldo Luiz Corrêa
