The futures sugar contract in NY expiring in March/2018 closed the week quoted at 13.67 cents per pound, a slightly weekly high of 4 points, after trying unsuccessfully to trade above 14 cents per pound several times. The bearish tone of the conversations during the Dubai Sugar Congress held last week brought even more discouragement and despair, mainly for those mills which still had (or have) pending pricing for March.
Just about all kinds of things was heard during the Bear Congress, as one of the participants maliciously called it secretly – that the market can go down to 11 cents per pound or even to 9 cents, according to what a futures broker stated. And a few traders over there said they estimate that the cost of sugar production in Brazil is 11 cents per pound, financial cost-free!!! A history of the Arabians; maybe it would be the case to evoke the great writer Malba Tahan, author of “The Man Who Counted” to try to explain to us how one gets to these 11 cents per pound of production cost.
The world macro scenario changes the background to darker colors while it watches the fall of the stock market all over the globe fed by the possibility of an increase in the American interest rates and, of course, by the resulting aversion to risk assets. It is no coincidence that in the weekly accumulated the commodities showed an extremely negative performance led by natural gas (12.36%), diesel (10%) and sugar (10%).
With regard to sugar, strictly following the line we commented on here last week, the funds are in no hurry to liquidate their short positions because whenever NY tried to break the dramatic barrier of 14 cents per pound, a flood of fixations from the origin came along with voracious appetite. This will be a game which will demand a lot of patience and determination for those who search for fixations at better levels than the current ones.
Regardless the unquestionably bearish scenario, the question for the traders now is how bearish we can still be at 13.50 cents per pound. Markets run away from reason and the trend is that we get influenced by the environment of dark clouds. Therefore, we frequently turn more bullish on a booming market and more bearish on a falling market, that is why the conversation in Dubai about 9 cents sounds natural for someone who has seen the market crumbling down since the start of the year under the same fundamentalist framework.
Just a reminder: at the Sugar Dinner in NY, in May/2010, the market was trading at 13.00 cents per pound and some gurus on duty, fitted with the cane that makes the seas open, determined that Hades was coming close and we would speedily and inexorably go to 10 cents and maybe we would trade at one digit. Six months later NY was above 32 cents per pound.
Just like there are people who buy bitcoin at 15,000 dollars because they think the sky is the limit and clap for the sun, there are people who sell sugar at 13.50 cents per pound because they think there is no floor to stop this bleeding. In both instances, those who pull the passionate component out of the decision-making analysis are the ones who make money.
580 million tons of sugarcane is Archer Consulting’s number for the sugarcane harvest for the Center-South for 2018/2019 and it is almost unanimous on the market. Just like the mix at 41.4% for sugar meets more supporters – although many mills believe that the tendency of this mix is even smaller. The worrying fact is that Brazil runs the serious risk of having to reduce its sugar availability by 6 million tons against the previous harvest. But in Dubai people talked about world surplus between 500 thousand and 11 million tons. I know, right?
How much sugar will or can Brazil export in 2018/2019? The accumulated in 2017 got up to 28.9 million tons (since September/2016 the 12-month accumulated has been above 28 million tons). To make ends meet this year, the reduction will have to be substantial once we have been at a standstill in terms of sugarcane production and sucrose production since 2010/2011. This is the first year that oil price has become an important component in ethanol pricing and its effect on sugar for the purpose of arbitrage and mix decision. It will be a year of learning.
The projected growth of the Brazilian economy for 2018, using the number of MB Associates of 3.5% should increase the consumption of Otto cycle fuel by 6%. Well, the consumption of fuels over the April/December 2017 period, according to ANP, was 40.5 billion of liters, which leads us to estimate 2017/2018 (April to March) will close at 53.8 billion liters. If we apply the potential growth projected above, 2018/2019 can demand another 3.2 billion liters of fuel which – considering that ethanol represents 40% at the headquarters – means 1.3 billion liters of ethanol equivalent to two million tons of sugar. Keep on adding up…
The average cost of sugar production in the Center-South, not taking into account depreciation or financial cost, is around R$42.00 per bag ex-mill. Using an average freight to the port of R$110 per ton, an increase of US$10.50 and the exchange rate at R$3.3000 we will come to 13.00 cents per pound.
Based on our estimate of the oil curve and of the exchange rate for the next six months and their effects on the pricing of hydrous, NY will need to trade at 15.50 cent per pound on average so that the Center-South starts to think about changing the current mix of 41.4% of sugar. That is, an increase by more than 13%. It will be an interesting year.
It is with great sadness that I announce the passing of the friend Paulo Leuzinger last Saturday in Rio de Janeiro. Paulo was a gentleman in the truest sense of the word. For many years he was the president of Tate & Lyle Brazil, a company to which he dedicated 42 years of his successful professional life. He was a great friend, knowledgeable about the sugar market as few are and he had an absolutely intelligent and delicious sense of humor. He had courageously been fighting cancer in the peritoneum for some months. The last time we talked on the phone he was upset about having to cancel a dinner with me because of the treatment he was making and he comforted me, “This will pass, my friend, you are already invited to my 100th birthday party”. He will be missed.
With still a month to go, there are only three 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. The next course should be held in August/2018. For further information: priscilla@archerconsulting.com.br
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Have a nice weekend.
Arnaldo Luiz Corrêa
