Once again the futures sugar market in NY was headed for one of those boring weeks. Stuck in an irritating and boring price range, the market had a slight recovery on Friday and October/2017 closed the session at 14.55 cents per pound, representing a 46-point high in the week equivalent to 10.14 dollars per ton.
Several mills are already starting to reduce their estimates of sugarcane production in the current crop. Despite the great productivity, the amount of sugarcane has been smaller than expected for these companies and the final number of the crushing of the Center-South might be negatively surprising. The ethanol is starting to make a difference. And the mills are starting to make the calculations for next year.
The combination of low-interest rates in Brazil and the downward curve of the dollar against the real put pressure on the value of the sugar in real for early 2018/2019 bringing its parity closer to the ethanol. That is, at the current levels of sugar traded at the NY exchange for May and July next year a lot of mills will migrate to the ethanol production without batting an eye – unless the sugar goes up and corrects this.
Next year will demand greater creativity and preparation on the part of the trading companies to encourage the mills to trade their sugar. The gas pricing policy introduced by Petrobras will stimulate the appearance of hedge and price protection structures using the RBOB in real, creating a synthetic put of ethanol for the mills and decreasing the need and urgency for them to decide on the production mix. In some cases, depending on the level and structure, that puts the ethanol in better conditions than the sugar.
2018 will be a much better year for the ethanol. The consumption curve of fuels starts to recover slowly and the improvement of the GDP will have a substantial impact, as it always happens, on the fuel consumption increase. We won’t have enough sugarcane next year to meet a possible return of the demand. The outlook for supply and demand will be tight in the face of a long seen stagnant production of sugarcane and ATR.
The average price of the sugar trading in NY in August was 13.80 cents per pound, below our 14.18-cent-per-pound forecast. For September, our model still shows that the average price during the month should be 14.01 cents per pound (up until Friday it was at 14.17 cents per pound).
The price range for September, with 95% of confidence, should be between 12.78 and 15.24 cents per pound. We believe – as we said in a previous report – that we have already seen the lowest price of 12.53 cents per pound. October will show a greater evolution in the price: the model shows 15.45 cents per pound in average but it can eventually reach 16.80 cents per pound. In November and December, the model says the prices might adapt and return to the range of 14-15 cents per pound average.
No wonder many mills, rightly so in our opinion, have rolled over their positions of sugar sales which are not yet fixed against the futures contract of October to March. It seems pretty clear for the model that the chances that this strategy will work are high. Other winds that blow in favor of the sugar are oil above 50 dollars per barrel, the dollar weakening against other currencies and the improvement of the commodities. Usually, when the market looks at the purchase of commodities as a valuable security, the oil is the natural candidate.
How much longer the funds will keep this position of 95,000 long contracts is the million-dollar-worth question. They were apparently caught on the back foot on the coffee market. It is possible the money they are making off of sugar can be used to decrease that loss. That is, will the funds start taking the hundred thousands of dollars that are on the table?
Put it down on your calendar: the XXIX Course on Futures, Options, and Derivatives in Agricultural Commodities will take place on March 6, 7 and 8, 2018 in São Paulo, SP at the Hotel Wall Street. The registrations will soon start. Don’t leave it to the last minute because the spots for the current edition ran out 40 days ahead of time.
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Have a nice weekend everybody.
Arnaldo Luiz Corrêa
