The sugar market in NY is still being overlooked, fluctuating as strongly as we had predicted on our last weekly comment that 2017 will actually be a year full of volatility. It’s not a market for the weak-hearted. The fundamentals are still the same and the futures fluctuate depending on the rollover of the funds or any news that pops up. The forecast numbers for sugarcane production in the Center-South released by several consulting firms are telling evidence that there are totally different views on how much it will be produced in the harvest due to start soon.
Last week, Archer Consulting announced the first production estimate for the 2017/2018 harvest in the Center-South: 586 million tons of sugarcane – with 35,428 million tons of sugar and 24,546 billion liters of ethanol, of which 10,771 billion liters are anhydrous and 13,774 billion liters are hydrous. We estimate that the production mix will be 47% for sugar and 53% for ethanol. The numbers the market works with range from 567 to 616 million tons of sugarcane. If that’s what happens here, do you still believe in the forecast coming out of India, dear reader? Yeah, right – that should take a lot of volatility.
Over the last five days, the market has fluctuated more than 100 points (a 21.22 high and a 20.13 low). Friday’s closing for March was 21.11 cents per pound, an 80-point positive fluctuation, or about 18 dollars per ton. The market has been trying to break the 21-cent-per-pound resistance and has finally succeeded. Actually, this is a temporary relief for the bulls which will depend on how the bears respond next week. Since no one has a crystal ball, it is preferable not to miss any chance to fix prices.
Regardless of where the sugar futures might go in NY, we believe it will be extremely hard, by analyzing the market fundamentals at this moment, for prices to match the high levels reached in the last quarter of 2016. Since then, the fact is that prices in real have dropped close to R$300 per ton in just four months. We have encouraged our clients to fix their prices along the curve whenever the converted values are above R$1,500 per ton. Our average price estimate for the 2017/2018 harvest is R$1,480 per ton, considering NDF and including polarization premium which, by the way, is still pretty profitable.
A weaker dollar against the real and the oil market having difficulty going over 55 dollars per barrel will make it difficult for us to have a better arbitrage between ethanol and sugar. Meanwhile, on the domestic market, hydrous is being traded at a discount which is around 350 points compared with VHP sugar.
A point worth being looked at is that there is a feeling the start of the 2017/2018 harvest will be delayed, which is somehow reflected on the May/July spread, though the premium today is smaller.
This week’s comment is a bit shorter because right now I am headed to NY where I will stay over next week attending a risk management course given by the honorable Professor Nassim Nicholas Taleb, author of the book “The Black Swan”.
It was with great sorrow that we learned about Dr. José Luiz Zillo’s death. He was a businessman in the sector and one of the outstanding leaderships who greatly contributed to the sugar-alcohol industry’s growth. I had the pleasure to work at Copersucar where he was really active. The sector has lost a reference in its history.
There are very few spots for Archer Consulting’s XXVII Intensive Course on Futures, Options and Derivatives – Agricultural Commodities, which will take place on March 14 (Tuesday), 15 (Wednesday) and 16 (Thursday), 2017 from 9 am to 5 pm in São Paulo, SP at the Hotel Paulista Wall Street. For further information contact priscilla@archerconsulting.com.br
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Have a nice weekend.
Arnaldo Luiz Corrêa
