The market closed this week with October/2017 quoted at 14.06 cents per pound, a 65-point appreciation in the week, or 14 dollars per ton. The values of NY converted by the dollar rate using NDF (Non-Deliverable Forward) are slightly above 1,000 real per ton. The cost of carry of October/2017 for October/2018 shows more than 10% a year. It is interesting to see that the March/May spread of 2019 is trading at zero.
Even the futures sugar market in NY has resisted well to the lack of strength of the physical market and the total absence of news that could raise prices. Nothing much interesting is happening in terms of production. The crushing continues at good pace and the ATR has been surprisingly high, raising the prediction of sugar production even with the change in mix for ethanol announced all over the world.
The advantage of accumulating birthdays is that many times we watch the same plot of a movie where only the characters change. Sugar today is the great villain of health just like coffee and egg which already filled this post in the past. Of course it depends a lot on who sponsors the specific “scientific research”, between quotation marks. We just have to follow the money and we will find it. To raise people’s awareness, a company of the food industry dumped a mountain of sugar on Time Square in New York informing that that huge amount of sugar was consumed every five minutes by children in the United States. And that’s that – sugar continues to be the great villain. And what does the International Organization of Sugar (ISO)? I don’t know.
The fact is that – as the numbers show – the consumption of sugar will keep increasing over the next years fed by Asia. We will sure grow less and also below what the production will be able to meet.
Look at Brazil, for example. Over the last four harvests the production of ATR grew by 2.30% a year. If we take that last seven harvests, on average, we have grown by 1.51% a year – therefore, below the consumption growth in Asia (above 2.6%) aligned with the estimated growth of ISO if we look at the curve of four years, but smaller if we use the curve of seven years.
None of this, however, will change the trajectory of the sugar prices in the short term. Although we have lived through the perfect storm addressed on our comment of last June 23, we believe that we have already seen the lowest level of the year (12.53 cents per pound) and the prices should slowly recover only from the last quarter of 2017 on.
Beyond this harvest we believe in very limited sugar production to meet the demand of ethanol and sugar (export and domestic market). Even admitting limited ethanol import up to a 600-million-liter ceiling a year, the current pace of yearly growth in Brazil (without investment) shows an accumulated deficit of 127 million tons of sugarcane between 18/19 and 21/22, which represent – keeping the mix of 48% of sugar – a lack of 11 billion liters of ethanol.
Today, about 35% of the car owners in the country choose ethanol when they fill up the tank. If it goes up to 40%, the ethanol deficit on yearly bases is 1.4 million liters. If we went back to the level of December/2009, when 54.5% of the consumption was ethanol, the deficit would jump to 5.4 billion liters. The market certainly does not make this calculation.
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Have a good weekend everybody.
Arnaldo Luiz Corrêa
