According to the International Monetary Fund, the economy of the emerging countries will grow 4.9% on average in 2018, while in the advanced economies the growth should be 2%, with the global average reaching 3.7%. Only three countries will have a growth below zero: dictator Maduro’s Venezuela, with a 6% fall, the Republic of Equatorial Guinea, another dictatorship, with a 7.8& fall of the GDP, and the newly independent South Sudan with a 3.4% fall.
However, the main sugar consuming regions – Asia, Northern Africa and the Middle East – will grow 5.4%, 4.1% and 2.8% this year, respectively. For the next two years, the IMF believes in continuously increasing numbers varying a few tenths. Sugar consumption growth, after analysis of these IMF numbers, should be greater than the estimated by most suppliers of the commodity.
Sugar world consumption has grown 1.85% on average over the last eight years and it can be increased by the strength of the economic activity in the mentioned regions. It is feasible to believe in the growth around 2.3%, slightly above the number presented by the Executive Director of the International Sugar Organization, José Orive, at recent lectures, which can require additional 1.6 million tons of sugar until 2019/2020.
Meanwhile, the funds continue adding more short selling to their robust short positions (now at unbelievable 166,533 contracts equivalent to 8.46 million tons of sugar) even though – if we only use reasoning as thoroughly discussed in the last weekly comment – no change in the fundamentals have occurred over the last days which would justify a 200-point fall on the market!!!
In the yearly accumulated, sugar stands alone at the sharp fall of 12.5% followed way behind by another soft commodity, coffee, with a 1.3% fall. All the other agricultural commodities are operating in the blue this year. On the energy market, oil accumulates a high of almost 10% in the WTI and a little over 5.5% in the Brent.
Since the introduction of the pricing policy of Petrobras following the foreign market, an opportunity for the mills to make protection operations against negative price fluctuations of ethanol using oil has opened up. And since then, Archer has been following up on the oil closings and comparing them with the hydrous prices.
After gathering these data and making necessary adjustments to decrease the dispersions and improve the adherence of the developed model, it can already be seen that the correlation is pretty high; today it is at 95.1%. The model can predict with reasonable accuracy which the hydrous price in the next working days is. For this reason, only, we see some mills hedge the ethanol price using Brent. Although the risk of the cross hedge (when we use a market to hedge another one) is inherent, the adherence of the two curves (Brent and hydrous) provides a lot of comfort to use this strategy.
The favorite argument of the bears when we see the disparity between the ethanol price and the sugar price (hydrous trading at 400 points over NY) is that ethanol will decrease in price at the start of the crushing because the mills will need immediate money to face the expenses incurred from the planting. It is possible. But yet as we commented on last week’s comment, the point we are trying to make is: how bearish can we still be at 13.36 cents per pound?
Some ingredients would be necessary for the sugar market in NY to keep the current level up until the start of the harvest: ethanol would need to plummet, but not to the point where it would be put at the parity of 65% or better or its demand would be greater and greater. So, we have to put some limiting factors into an equation: ethanol can fall, but it cannot be cheaper than 65% of the gas price at the pump; to match the equivalent sugar value in NY, oil needs to fall or the real needs to appreciate (or a combination of both). But we cannot forget that the price at the pump is made up of 40% of fuel (28% of gas A imported by Petrobras and 12% of anhydrous), that is, in order for the price to fall at the pump, the Brent would have to melt.
If we were to expect a perfect storm which combined the real appreciating against the dollar at R$3.0000, the Brent plummeting to 55 dollars per barrel, ethanol at the threshold of 65% of the gas price at the pump, even so the hydrous would be trading at the equivalent of 100 points over NY.
Therefore, stressing out the scenario very carefully, where would you dear readers place your chips betting on what directions the market will take? Where are the next 100 points of variation headed – upward or downward? What is wrong with this scenario?
There are only six spots available for the XXIX Course about Futures, Options and Derivatives on Agricultural Commodities which will take place on March 6,7 and 8 2018 in São Paulo, SP at the Hotel Wall Street. For further information: priscilla@archerconsulting.com.br
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Have a nice weekend.
Arnaldo Luiz Corrêa
