On our last comment last year we said that 2016 would be a good year for the mills mainly because of the extraordinary value in real they were managing to fix their export sugar at for the next harvest (in this case the current one). And there is no denying that 2016 has been a very positive year for the sector.
The average fixing price of the mills for the 2016/2017 harvest, for instance, was R$1,218 per ton, 28% above the average price for the 2015/2016 harvest. The price average for sugar on the domestic market also experienced a 53% increase, going from R$46.66 per bag last year, tax-free, against R$71.32 per bag this year (data up until December 9). Anhydrous and hydrous were between R$1.6702 and R$1.8547 per liter on average, respectively, against R$1.3540 and R$1.4361 per liter last year – a 25% increase on average. We can also point out the increase in the anhydrous consumption by a little over half a billion liters despite the fact that the total fuel consumption has fallen by 1.4 billion liters, and also the improved financial health of the mills, including the reduction of the net debt between R$3 and R$5 billion.
What does the year 2017 have in stock for us? We believe prices in real per ton won’t be as lucrative as the ones traded in 2016. It will be really difficult to have the almost 1.762-real-per-ton peak we saw on October 5 (a combination of NY at 23.81 cents per pound and the dollar at R$3.2212) happen again. However, there seems to be some consensus that sugar on the world market will still be traded at better prices than it is now in cents per pound (keeping in mind that the 2017/2018 average in NY was 17.59 cents per pound).
We should remember that since the price peak the market had early October, March/2017 has plummeted 600 points; May/2017 has fallen 500 points; July/2017 has fallen 425 points; October/2017 has fallen 360 points and March/2018 has only fallen 300 points.
Wanting the market to repeat the almost 24 cents per pound? That is a tough one, huh? We’ll need a perfect storm so that happens. Our projection, sent to Archer Consulting’s clients in detail, is of average prices around R$1,400 per FOB Santos ton equivalent to sugar.
The bulls have some good arguments: the first is that the market still hasn’t absorbed the possibility that the 2017/2018 harvest might be way below 580 million tons of sugarcane. There are people who have strong reasons to believe that there could a huge fall. Second, because some analysts believe that with Trump, with a strong warmongering trait, oil can reach over 70 dollars per barrel during the year. Third, an argument coming from Europe that the magic number of 500 euro per ton some use for the white sugar as a floor puts raw sugar at the minimum level of 19.50 cents per pound. The fourth argument is the fact that the production in India is below the one expected, making for the possibility that that country will import sugar next year. The fifth argument – I don’t get tired of saying again and again that Pedro Parente’s competent management has been pivotal for the sugar-alcohol sector, for it has brought transparency to gas pricing and, therefore, the arbitrage between ethanol and sugar will be a lot more susceptible to an eventual increase in oil price on the foreign market. In other words, the mix can too change!!!
The bears also have some good arguments. First, the perception that the physical market is totally lethargic, without any supply problem. Second, the real weakness reflecting the political and economic crises the country is going through. Third, the sugar mix increase for the next harvest, although the price difference between sugar and ethanol has been narrowed. Fourth, the funds have liquidated a lot, but are still long by a good volume. I wonder if they will get rid of it at the beginning of the year.
The efficient risk management continues to be the best recipe to assure good results in 2017. Don’t believe in gurus and have discipline and focus. There is no free lunch when some greedier salespeople try to sell you on fantastic strategies. Set up your own strategic plan for price management and be disciplined.
Unfortunately, I haven’t been able to enjoy my Blue Label that has been impatiently sitting on the shelf of my bar waiting for the celebration of Lula’s arrest. If in 2016 Brazil was able to get rid of the gang headed by the diseased party of crooks, the plea deals of executives of companies involved up to their necks in all kinds of crime show that Brazil still has a long way to go before it can really be free of these entrepreneurs and politicians that have turned out to be a bunch of outlaws, crooks, corrupt, embezzlers, and thieves.
In 2016 we got another 643 readers compared to the last report of 2015. These are people who read our comments on Saturday morning. A total of 5,500 people receives our comment in Portuguese and English. On Archer’s site, the most accessed comment was the one on November 11 entitled “Market Reacts Well to Liquidation of Funds” with 3,596 hits.
Registrations for the XXVII Intensive Course on Futures, Options, and Derivatives – Agricultural Commodities sponsored by Archer Consulting are open. Put it down on your daily planner – March 14 (Tuesday), March 15 (Wednesday) and March 16 (Thursday), 2017, from 9:00 am to 5 pm in Sao Paulo, SP at the Hotel Paulista Wall Street. Make your reservation because we have limited spots. For further information, contact priscilla@archerconsulting.com.br
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I wish all our clients, readers, suppliers and employees a MERRY CHRISTMAS and a PROSPEROUS 2017. Thank you so much for all your support.
THIS IS THE LAST REPORT OF THE YEAR. WE WILL BE BACK ON JANUARY 28, 2017.
