The sugar futures market in NY closed the week with October/2017 traded at 14.37 cents per pound, practically unchanged compared to the previous Friday’s closing. This has been a week without much enthusiasm.
The Brazilian Real, despite all the political turmoil under which the country has learned to live, continues to show that it can get up to R$3.0000 up until the end of the year (according to some analysts), which would decrease the import value of gas on one hand, and would squeeze the arbitrage of ethanol with sugar. Lower internal interest rates flatten the futures curve of NDF (Non-Deliverable Forward) and dwindle the values in real per ton for future maturity. There are several variables which the mills have been trying to get used to working with and, admittedly, the decision process is volatile.
At least, to relieve a little, the mills which had export sugar to fix against July/2017 (already expired) and managed to negotiate with the trading companies to price this sugar against October/2017 were favored by the market improvement. We estimate that this roll-over must have brought close to additional 40 dollars per ton for the mills. It was a good strategy.
Although many things have to happen to bring the sugar market in NY to a more lucrative level, we are fully convinced that we have already seen the year’s low (12.53 cents per pound). Something totally drastic would have to happen (internal or external factor) in order for us to have this expectation reversed, such as oil price plummeting and a strong real devaluation.
Indeed, as it usually happens over the April-May-June-July four-month period, this is when we see the lowest prices of the year. It looks like 2017 will be no different. August should present a slight improvement on the average month price compared to July.
In 75% of the occasions, the average traded value in the month of August over the last 17 years has been higher than the lowest traded average over the April-May-June-July period. Therefore, we believe that prices will reach 16 cents per pound sometime in the last quarter of 2017.
It is interesting to note that on Friday 6,000 call spreads of the exercise price of 14.00/15.00 for October were traded. Someone is betting that the market can get to 15 cents per pound and has paid 18 points to have this privilege.
This optimism is legitimized (my bearish readers will say) by the price recovery of oil on the foreign market (in the last week of June it was quoted at 42 dollars per barrel and now it is coming to 50 dollars per barrel). The fuel pricing policy in Brazil, determined by Petrobras, not only makes it possible for hedge operations using oil or RBOB (gas) to fix ethanol price (the combination of this operation with NDF is recommended) but it also shows that the equivalent sugar price support has increased.
The government, after being pushed by the sector, should partially reduce the increase in tax on ethanol equivalent to R$0.08 per liter, which should improve the competitiveness against gas.
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. Only 7 weeks away, we just have 6 spots left. Don’t leave it to the last minute. The next one will only happen in March or April, 2018.
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Have a nice weekend.
Arnaldo Luiz Corrêa
