In this first comment of the year, I wish all our readers a great 2017 after a break to recharge the batteries.
The sugar market in NY at the end of the year closed at 19.21 cents per pound closing the year at a 28% high in dollar terms and just 5% in real (this is the reason why I insist we have to look at the values in real). A performance that helped the sector create cash and reduce debt which based on our numbers was R$86.87 billion, a 6.65% fall compared to December 2015.
For the industrial consumers, mainly the food and beverage industry, 2016 was particularly challenging when it came to keeping the cost of the end products along the year, directly affecting the profit margin. The domestic market for those who bought sugar based on the ESALQ index was painful. Without the possibility of hedging to mitigate the risk of price fluctuation and the detachment of the foreign market, the industries which insist on using the indicator with this purpose must be scratching their heads. The learning keeps happening through pain, not love.
The mills are more and more bent on not missing opportunities to set sugar prices in real per ton for export reflected in NY. We reiterate we find it difficult for prices to reach the same R$1,770-per-ton ceiling this year as we saw in October last year. The most recent forecast Archer informed its clients of early this month is that the 2017/2018 harvest will present an average price of R$1,510 per ton for VHP FOB Santos export sugar. It is still a remunerative price despite being at almost 2% below the average traded up to now of the 2016/2017 harvest which is R$1,537.77 per ton, with polarization premium.
There are many factors that can substantially raise sugar volatility on the world market. If the uncertainties already abound in the aspects directly linked with the sector, imagine if we add the impacts of eventual economic tricks coming out of Trump’s administration.
Internally, as we supposed, there is no consensus on the size of the sugarcane harvest for 2017/2018, where the numbers go from 560 to 600 thousand tons, or the production mix or on the ATR. Only about these aspects, we could be talking about a production difference of 2 million tons of sugar plus or minus. India has also given evidence that it is a difficult producer to understand given the wide range of variables found in that country’s sugar universe. China should import sugar but to an unknown pace and volume. How about the real, then? As a reputable economist in the sector would put it, “if you want to embarrass yourself, make some forecast about the dollar trajectory”. With all these ingredients in the cake recipe, it becomes difficult to know whether the outcome will be sweet, salty, bitter, acid or sour.
The article by professor José Roberto Mendonça de Barros, published in O Estado de São Paulo newspaper last Sunday, is worth reading. I point out the part that directly affects us, “…the agreement among exporting countries to maintain oil price, as usual, will end up failing. We are more likely to see prices below US$50 per barrel in the upcoming months”. If the professor is right and the real keeps appreciating against the dollar, the ethanol-gas parity will push the mills to optimize sugar production.
The seventh export pricing estimate of the mills in the futures sugar market in NY for the 2017/2018 harvest shows, according to the model developed by Archer Consulting, that up until the end of 2016 a little over 10.7 million tons had already been fixed (40.6% of the estimated export). The average price found was 17.38 cents per pound. In previous harvests, the top percentage of accumulated fixation until December was 36.28% in 2014/2015.
The volatility in the futures sugar market in NY early this year is 31.65%. For you to have an idea of this behavior, the volatilities of the market of 50 and 100 days are 28.79% and 28.25%, respectively.
According to the model developed by Archer Consulting, the average closing price of the first sugar contract in NY for the next three months – which our clients were informed of at the beginning of the month – will be 19.48 cents per pound for January, 19.75 cents per pound for February and 18.78 cents per pound for March.
Registrations for the XXVII Intensive Course on Futures, Options and Derivatives – Agricultural Commodities by Archer Consulting are already open. Put it down on your daily planner – March 14 (Tuesday), March 15 (Wednesday) and March 16 (Thursday) 2017, from 9:00 am to 5:00 pm in São Paulo, SP at the Hotel Paulista Wall Street. Make your reservation because we have limited spots. For further information: priscilla@archerconsulting.com.br
If you want to get our weekly comments on sugar straight through your email, just sign up on our site by logging onto https://archerconsulting.com.br/cadastro/.
Have a nice weekend everybody.
Arnaldo Luiz Corrêa
