Petrobras announced Friday night a new reduction in the average fuel price by 5.9% at the refineries. It’s just normal that there is a negative impact of 60-70 points on sugar prices at the market reopening Monday.
The market up until then had reacted well despite a huge physical delivery (1.6 million tons) at the expiration of the July futures sugar contract in NY. What could add new pressure on prices had a reverse effect, so the trading months at the Exchange closed in positive territory. What can serve as a counterpoint to the bearish environment led by the sugar fundamentals was the fact we are at the end of the semester and the funds that were heavily short on the market can have partially or totally liquidated their positions (buying) and bringing NY close to 14 cents per pound again.
It’s too early to say this wave will continue. However, it helped the market free itself from the ropes it was tied around in and try to recover after kissing the canvas at 12 cents per pound. But then Petrobras came along and…
Last year, when the funds kept a record long position which was accountable for the sugar market in NY hugely trading around 24 cents per pound, few people believed NY could rise even further and we encouraged the mills to fix their robust prices in real per ton. It’s worth the same now. With this huge position will the funds have more appetite to add new shorts at the current price levels? Has the time to take profit come? But then Petrobrás came along and…
At that time, hydrous ethanol was sold at 850 points equivalent below NY sugar, a record discount. Actually, it wasn’t ethanol that was depreciated, but sugar. We said then there was clearly a dichotomy between the physical and the futures. It looks like we are before the same case, but on the floor below.
It’s difficult to imagine that the market can return to levels of R$1,500-1,700 per ton by analyzing the fundamentals. Something extremely serious and overwhelming would need to take place. But, other than exogenous factors, it’s a little clearer now that we should have seen the lows yet. For example, some mills are openly changing their mix to anhydrous ethanol given the poor performance of the sugar. Another important factor is that at the current levels, taking October/2017 closing, at 13.81 cents per pound on Friday, what countries can produce sugar at this level? The production cost in Brazil is 13.88 cents per pound ex-mill, in Thailand it is 15.49 cents per pound, in Europe it is 17.50 cents per pound.
It’s true that these issues are far from influencing the short term, but they show that structure-wise the sugar price is constructive in the medium and long terms. There is no investment in expanding the sugarcane field, renovation is below what is needed, there is consumption potential for the next years that will not be fulfilled. To have an idea of how big the problem is, even if we have zero growth of the Brazilian economy till 2022 and keep the same level of yearly sale of new vehicles, we will need 80 million tons of sugar cane to meet ethanol consumption.
Of course, there may be corn ethanol import, or even gas A import, or mix reduction. Whatever the palliative solution is, we will bump into the logistics restriction to make the imported fuel arrive where it has to. The easiest thing is to raise prices. In this case, as in other simulations, we invariably arrive at the sugar price moving up.
In the short term, an eventual continuation of the movement of the sugar high in NY can be fed by the repurchase on the part of the funds of their short positions, taking profit. They were short until last Tuesday at 116,500 contracts!!! The existence of buy stops cannot be ignored by the trading companies which were betting that the market would keep falling. But then Petrobras came along and we will need to see how the market will respond to this new reduction.
The amount of sugarcane production in the Center-South won’t influence the price yet, but we can see a predisposition on the part of some mills to reduce their crushing numbers. Oil has great support at the 40-42 dollar-per-barrel level, below which it is impracticable for some producers. Fuel consumption has room to increase and it shows that it falls less than the GDP when the economy shrinks and it increases more when the GDP goes up.
On the other hand, if oil drops below the 40 dollars per barrel and the real values against the dollar, new reductions in gas price for consumers will put huge pressure on sugar. Some initiatives which raise the market floor hover over the market: CIDE introduction, the import tax on ethanol and the progress of the discussions about RenovaBio. Will the reduction in gas price open up more room for the reintroduction of CIDE?
After all, have we seen this market’s low (12.53)? I really believe we have, but I have been wrong many times before. But then Petrobras came along and…
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. With 3 months to go before the course takes place, 1/3 of the spots have been filled. Don’t leave it to the last minute.
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Have a nice weekend.
Arnaldo Luiz Corrêa
