Sugar Market – Weekly Comment – June 12 to June 16, 2017
MODELS, VILLAINS, AND HEROES
Last week we commented on the vulnerability of the high in NY that week and the importance that oil would play in pricing in the context now that the mills are figuring out their products’ profitability. Any domestic decrease in gas price has an immediate impact on ethanol price for the consumer and changes the product mix in the Center-South in favor of sugar.
The alleged expansion of sugar availability puts pressure on the price of the commodity at the Exchange, rushes the mills in more delicate financial health to close commercial contracts of the surplus production with the trading companies at unfair discounts and puts companies with distinct profiles into the same mess.
Right now we see the lowest sugar prices in NY equivalent in real per ton since 2015, based on this Friday’s closing at 13.44 cents per pound and the real being traded at R$3.2870. And the main feeding factor for this low, besides the funds which are now at 63,000 sold contracts, is the gas price decrease which has been used as a trigger for the market to bet on more sugar being produced.
The price models showed once again that models fail. They serve as another indicator in the cockpit, but no plane stops falling because of it. The model we released to clients early this month showed that NY would be between 14.42 and 16.97 cents per pound in June, with the average price at 15.70 cents per pound. The average price so far has been below 14 cents per pound and NY would have to trade in the remaining days at a 150-point high to reach this value. That is hard.
The use of models to predict prices is part of the markets. The Black & Scholes model itself, created in 1973 to determine the fair value of an option has numerous restrictive assumptions, among which, for example, to take for granted that the volatility is constant and that the markets do not suffer price gaps. As we know, both assumptions are improbable, but even so, there is no model that is more used than the Black & Scholes.
What no model can predict is that Petrobras, for example, would introduce two consecutive reductions in gas price, just about eliminating, given the fragile current fundamentalist picture, any reaction from sugar prices.
There are some good things the mills can take advantage of the moment the sector is going through. The first one is that today we have what we wished for in the past, that is, fuel prices following the foreign market. It’s never too much to point out that in the past PT’s (Workers’ Party) governments froze gas price in order to encourage car sales and control inflation. That is, the sector didn’t take any advantage of the oil high prices in 2006/2007 with the barrel coming to 138 dollars per barrel. The sector was left high and dry and had to pick up the car spree bill for 84-month car loans while its debt went up in the inverse proportion of the artificial prices.
If he keeps the pricing transparency policy, Pedro Parente, who is the “villain” to many opinion leaders, though I disagree about it, can turn into a hero when oil price goes up for any market reason and the state-run oil company promotes, immediately thereafter, price adequacy on the domestic market. He might even be invited to be the key speaker at some important event of the sector. That’s life.
The second good thing is that many small and mid-size mills have learned that discipline in risk management pays off. It has been rewarding to watch the professional conduct that several mills adopted when they aggressively fixed their export sugar contracts when the commodity price in NY reached really high profitable levels equivalent in real per ton.
As a lesson, what a lot of people have learned is that you don’t repurchase hedge in the vain hope that by pocketing the profit of the operation there will be another opportunity to hedge again on a growing market and everybody will live happily forever. The decision made by a few mills to repurchase their sale hedges was bitter. Some did so out of the urgent need to liquidate previous debts, but others repurchased just “thinking” that they would resell again later and, that way, improve their sale result. So, for some this meant to see the market plummet more than 60 dollars per ton, without being able to fight back.
Based on this Friday’s market closing numbers, anhydrous is the product which best pays the mill. Therefore, the mills should carefully look at this potential change in the sugar mix to see it is really beneficial. Ethanol’s supply and demand situation will deteriorate up until the end of the year. In my opinion regardless of the changes in the world surplus, which varies according to the quotes at the American exchange, the Center-South won’t crush the amount of sugarcane it predicted nor will it produce the volume of sugar it expected to. Let’s see.
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 our discounts.
If you want to get our weekly comments on sugar straight through you e-mail, just sign up on our site by logging onto https://archerconsulting.com.br/cadastro/.
Have a nice weekend.
Arnaldo Luiz Corrêa
