The sugar market in NY continues to sink like there is no tomorrow. We have been watching an overabundance of bearish news which keeps piling up, strengthening the fall and causing panic and despair in those who saw the market come to melt 700 real per ton in seven months and just kept watching it. As it usually happens in situations like this, those were bullish back last October and would only sell sugar at R$2,000 per ton now fear that the market will break and they will have to fix at R$1,000.
May/2017 came to trade at 15.12 cents per pound during the week, to expire this Friday at 16.04 cents per pound. Compared to last week, NY dropped 37 points (8.16 dollars per ton). The months corresponding to the 2017/2018 CS crop dropped on average by 7.50 dollars per ton, while those to the 2018/2019 devalued by 7 dollars per ton. Based on Friday’s closing, May expired at R$1,172 per ton.
May/2017 delivery reached 1.5 million tons showing the weakness of the physical market again.
The question the market wants to be answered is if the funds will turn short from these levels up. That might even occur, but the profit potential below 16 cents per pound must be very limited.
How about those companies that did not fix their export sugar for delivery in July? Will they fix at any price? It is unbelievable that well-structured companies, without cash flow problems, but having only the owner making decisions based on who knows what such optimistic assumption, are at a fixation volume for 2017/2018 below 30%. There is a shortage of discipline and humbleness.
Changing the subject a little, as we know, since last year the Ministry of Mines and Energy has started a transparent discussion on how to increase the production of biofuels in the country with environmental, economic and financial predictability and sustainability, with an eye on the potential growth of the market and in line with the commitments made by the country at the COP21 (the Paris Agreement, which defined measures to reduce the effects of climate changes and which were approved by almost every country). The increase is not just about ethanol, but also about biodiesel, which makes Brazil the second largest producer and consumer in the world.
For you to have an idea, the Ministry of Mines and Energy assumes that Brazil would have to double ethanol production until 2030 to something around 50 billion liters. Today, by Archer’s estimates, in the current scenario, we would not be able to get even to 35 billion, which would make us, in 2030, importers of corn ethanol and/or gas to meet the demand that there will be down the line.
In order to reach this ambitious goal of 50 billion liters, we need predictability, clear rules, investments, legal safety, transparency in fuel pricing and the creation of a mechanism which provides biofuel (via price) with the advantages that it embeds with regard to environmental sustainability.
Well, well… And who would go against this, right? The sugar-alcohol sector suffered over the 13 years PT (Workers’ Party) was governing huge losses when it was used as the major indirect financial backer of the car industry. Artificially low fuel prices encouraged the consumption by means of the expansion of the fleet, fiscal incentives (today we know that Provisional Measures were negotiated with the Executive) and the sector having to sell ethanol at cheap prices. Just look at the graph of the total debt of the sector compared to the withdrawal of the tax on fuel: they are inversely related.
Petrobras does not back up RenovaBio. It believes that competitiveness of the industry and of the agricultural sector can be compromised. Since Brazil, according to it, already has a high participation in renewable fuels at its energy grid, it should be released from creating more room for biofuels. This is old talk – that same unfounded story that biofuels have an impact on the food production and on deforestation. Even the respected The Economist already fell for this fallacy in 2006/2007 when it featured on its pages that the era of cheap food was ending when oil was trading above 300 dollars per barrel.
The Brazilian state-run oil company argues, that “even Europe pulls away from this kind of solution” (renewable fuels) as if it were possible to compare what Brazil has in available agricultural land to the Old World. In its Technical Report, Petrobras points out the competitiveness between gas C and hydrous ethanol and the resulting exogenous factors (exchange rate, taxes, etc); about the allocation of the production mix and the effects that the biofuels mandates can bring to the international price of sugar and it shows that the growth rate of the adult population (capable of acquiring a vehicle) drops more quickly than the growth rate of the population. That is, why expand if the fleet will drop down the line?
Archer’s estimates show that regardless of RenovaBio, the consumption in 2030 should reach 73.5 billion liters of equivalent gas (Otto Cycle) and an increase in the fleet by about 13 million vehicles (an increase of 17 million flex vehicles and a decrease of 4 million gasoline vehicles). RenovaBio is the chance the sector has not to lose a market that creates jobs here in the country and to be able to restructure after years spent subsidizing the crazy excesses of Lula, Dilma and their gang.
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This week, UNICA released its harvest number: 585 million tons of sugarcane, split into 35.2 million tons of sugar and 24.7 billion liters of ethanol. The number is pretty close to the estimate by Archer Consulting, released in early January, of 586 million tons of sugarcane – 35.5 million tons of sugar and 24.1 billion liters of ethanol.
Seara Agroindustrial, one large company in agribusiness in Brazil located in the North of Paraná, last week filed a request for a billionaire judicial reorganization with an estimated liability of R$2 billion. Among the creditors are large financial backers of the sugar-alcohol sector. This means less money available for the mills. Among the biggest creditors are a co-op of American producers (R$681 million), a European bank with a strong presence in agribusiness (R$153 million), a NY-based fund (R$144 million), a small-sized Brazilian bank (R$113 million) and an American trading company (R$56 million). The company was exposed to price fluctuations of soybean and corn on the foreign market.
Archer Consulting 28th Intensive Course on Futures, Options and Derivatives – Agricultural Commodities (in Portuguese) will be held on September 19 (Tuesday), 20 (Wednesday) and 21 (Thursday) 2017 from 9:00 am to 5:00 pm in São Paulo, SP at the Hotel Paulista Wall Street. Don’t leave it to the last minute and enjoy the discounts.
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Have a nice weekend.
Arnaldo Luiz Corrêa
