The futures sugar market in NY closed the week at 14.15 cents per pound, a 47-point high in the week.
It might still take a while before the sugar market gets used to the new fuel pricing policy adopted by Petrobras under Pedro Parente’s term. If the new approach of the state-run Brazilian oil company shows signs that it is here to stay, it will bring huge benefits to the sector over the medium and long terms. A long time ago here when we brought up the subject that gas price in Brazil should follow the foreign market because that way there would be room to expand the sector sustainably, an executive from the sector at the time alerted us, “forget it, this will never happen”. It really has not happened and has even gotten worse.
In the disastrous years led by PT’s (Workers’ Party) governments, not only Lula but also his pawn blew off the sugar-alcohol sector after the discovery of the pre-salt. They subsidized the gas price to the consumer following the populist political marketing to the letter , freezing it and stepping on the neck of the industry which shared the bill with the Brazilian taxpayer (via destruction and robbery at Petrobras). Over a decade, the sector lost money, competitiveness, shrank and increased the debt of the mills in the inverse proportion of the fall of the CIDE managed by Dilma, who felt towards the sector the same affection we feel towards venomous animals.
PT’s gang who camped out in Brasilia for thirteen years is responsible among other evils for the shrinking in the participation of ethanol in the energetic matrix which got to 54.5% once (today it is at 44.5%) and for a revenue loss only over Dilma’s stupid term of more than R$100 billion. Therefore, when we see an executive such as Pedro Parente, who is competent and knowledgeable about the free market, we cannot help but be happy.
The first benefit of this new Petrobras’ approach is the transparency. The sector spent many years producing a product (ethanol) whose sale price had no relation to sugar or oil. More than half of all the crushed sugarcane in the country depended on a product (gas) whose price was administered by the government. Without any possibility of protecting cost or margin, for the sugarcane producer it was like a lottery. Less than 1/3 of the total crushed sugarcane in the country, which was destined for the production of export sugar, could effectively have its price protected by means of hedging on the futures market in NY. It is difficult to manage a commodity of this nature. Take the case of the soy complex, on the inverse way taken by the sugarcane: both the grain and the soymeal and oil are widely traded at the Chicago exchange. Eventual supply and demand imbalances of any of the products are immediately reflected on all the chain, opening up opportunities of hedging and arbitraging for the producers and processors more engaged with risk management.
The second benefit is the possibility of sugar and ethanol finally being communicating vessels, creating opportunities of arbitraging and hedging in a not so distant future. As soon as this modern pricing policy takes roots and gains the credibility of the market participants, the mills will be able to hedge the hydrous ethanol price via cross-hedging, using the price curve on the futures market of RBOB or oil together with NDF, decreasing volatility and opening up room even for the hedging of the mix. There will be no shortage of derivative products traded at the exchanges and offered in real. The ethanol contract at B3 (former BM&F BOVESPA) has a huge opportunity to finally turn into a reference there.
Maybe this small change has not yet been totally digested by the market. Maybe those are more skeptical see it as being harmful, but I dare believe that a meaningful change as to how we will manage sugarcane business over the next years might be in progress.
We may be facing an important transformation and a rare opportunity to make sugarcane into a commodity in the true sense of the word, just like the soy complex did. However, the urgent task to modernize, to look at the risk management professionally is up to the mills. There is no more room for speculations disguised as hedges, or to think there are advantages without a counterpart. Or to believe that there is free lunch. Those who do not invest in knowledge will bite the dust. The future is knocking at the door.
To calm things down, Andy Hall, one of the largest traders in the oil world, known for having made a lot of money on the market and for having correctly foreseen the trajectory of the prices of the commodity, said he is skeptical of a possible recovery of prices.
I will be on vacation for two weeks. Over this period the weekly comment will not be published. We all need some time to recharge our batteries. We will be back on the weekend of July 29th. See you then.
Arnaldo Luiz Correa
