The sugar market in NY closed at 13.66 cents per pound, a 29-point high against the previous week. Next week, when March/2018 expires, there is some expectation with regard to the delivery. Don’t forget that last year a great producer made a large delivery and that was the ignition point for the market to start its free fall trip. I find it pretty unlikely that this will happen again next week.
The predictions among mills, trading companies and specialists from the sector about the size of the sugarcane crushing in the Center-South for the 2018/2019 harvest are consolidated. The average number is around 585 million tons of sugarcane which should produce 32.4 million tons of sugar and 26.2 billion liters of ethanol. We believe in a smaller number for sugar – 30.5 million tons of sugar – and we are basically on the same page as to the average production of ethanol. The bias is small for new predictions because many believe that revisions that might come along will be for a smaller amount of sugarcane.
However you look at the supply and demand calculation in Brazil based on the above numbers, the most plausible conclusion is that the numbers don’t add up. The production of 35 million tons of sugar (Brazil) is not enough to meet the domestic demand plus the international market and a further increase in the consumption through the 3.85% GDP increase predicted for 2018.
Let’s take a domestic consumption of 12 million tons out of the 35 million tons of sugar (note that we are not using Acher Consulting’s prediction, which is smaller, but the consensual number of the market). That way, there would be 23 million tons of sugar left for the export market, a volume way below the 26.6 million tons on average seen over the last three years or the 28 million tons plus on average over the last twelve months. That is, Brazil will inevitably take away about 5 or 6 million tons of sugar from the foreign market. The domestic market for sugar can turn into an extremely booming one.
This makes us ponder over a point which has not been much exploited in recent conversations, that is, the impact this decrease in the availability of sugar to be produced in the 2018/2019 harvest might have on the local market. We might see a significant increase in prices because the sugar traded on the domestic market will have to compete with the ethanol which pays much better and with the NY futures market. Today, for example, with the dollar at R$3.2400 and taking NY at 13.67 cents per pound, ESALQ should be worth (not by equivalence, but based on the price curve which shows high correlation) R$58.80 and it is around R$52.20. The model infers that either NY should fall further down (which we don’t believe will happen because of the reasons set out in the last comments) or ESALQ will have to go up. This is our bet.
Another point to be exploited is about the short volume unsettled by the funds – 140,000 lots which amount to 7 million tons of sugar. Let’s assume there are still two million tons of sugar to be priced against May/2018, from roll-overs of previous maturities. In May itself, the 2018/2019 fixations should represent 3.75 million tons of sugar, 2/3 of which should already have been fixed. That is, on one side we have the funds at 7 million tons of sugar, which theoretically could be covered, and on the other side we have only 3.25 million of potential sellers (only Brazil). We would still have to deduct the estimated volumes of fixation of other producing countries. If Brazil, in theory, holds 55% of the market, then the game would be relatively balanced. Is it?
Based on the preliminary calculations we have made, the average price of sale by the funds should be between 13.56 and 13.88 cents per pound, leading us to correct what we said here a few weeks ago that the funds were making a lot of money. That is not true because the short position started to be built at 14.63 cents per pound, but it kept adding more volume between 14.30 and 13.19 and in January the funds covered part of the short sales at much higher levels. Our opinion is that only from 13.88 up will we see some reaction on the part of the funds to settle their positions for May/2018. Let’s keep an eye on it.
A trader based on NY, a long time veteran on the sugar market, who writes about the market every day, is extremely bored with the irritating interval of 250 points of the futures market over the last six months, listed a few of the words that could well define the current sugar market: sadness, pathetic, horrible, crappy, insensible, which destroys the soul and other less publishable words.
If you want to get our weekly comments on sugar straight through your email, just sign up on our site by logging onto https://archerconsulting.com.br/cadastro/.
Have a nice weekend.
Arnaldo Luiz Corrêa
The sugar market in NY closed at 13.66 cents per pound, a 29-point high against the previous week. Next week, when March/2018 expires, there is some expectation with regard to the delivery. Don’t forget that last year a great producer made a large delivery and that was the ignition point for the market to start its free fall trip. I find it pretty unlikely that this will happen again next week.
The predictions among mills, trading companies and specialists from the sector about the size of the sugarcane crushing in the Center-South for the 2018/2019 harvest are consolidated. The average number is around 585 million tons of sugarcane which should produce 32.4 million tons of sugar and 26.2 billion liters of ethanol. We believe in a smaller number for sugar – 30.5 million tons of sugar – and we are basically on the same page as to the average production of ethanol. The bias is small for new predictions because many believe that revisions that might come along will be for a smaller amount of sugarcane.
However you look at the supply and demand calculation in Brazil based on the above numbers, the most plausible conclusion is that the numbers don’t add up. The production of 35 million tons of sugar (Brazil) is not enough to meet the domestic demand plus the international market and a further increase in the consumption through the 3.85% GDP increase predicted for 2018.
Let’s take a domestic consumption of 12 million tons out of the 35 million tons of sugar (note that we are not using Acher Consulting’s prediction, which is smaller, but the consensual number of the market). That way, there would be 23 million tons of sugar left for the export market, a volume way below the 26.6 million tons on average seen over the last three years or the 28 million tons plus on average over the last twelve months. That is, Brazil will inevitably take away about 5 or 6 million tons of sugar from the foreign market. The domestic market for sugar can turn into an extremely booming one.
This makes us ponder over a point which has not been much exploited in recent conversations, that is, the impact this decrease in the availability of sugar to be produced in the 2018/2019 harvest might have on the local market. We might see a significant increase in prices because the sugar traded on the domestic market will have to compete with the ethanol which pays much better and with the NY futures market. Today, for example, with the dollar at R$3.2400 and taking NY at 13.67 cents per pound, ESALQ should be worth (not by equivalence, but based on the price curve which shows high correlation) R$58.80 and it is around R$52.20. The model infers that either NY should fall further down (which we don’t believe will happen because of the reasons set out in the last comments) or ESALQ will have to go up. This is our bet.
Another point to be exploited is about the short volume unsettled by the funds – 140,000 lots which amount to 7 million tons of sugar. Let’s assume there are still two million tons of sugar to be priced against May/2018, from roll-overs of previous maturities. In May itself, the 2018/2019 fixations should represent 3.75 million tons of sugar, 2/3 of which should already have been fixed. That is, on one side we have the funds at 7 million tons of sugar, which theoretically could be covered, and on the other side we have only 3.25 million of potential sellers (only Brazil). We would still have to deduct the estimated volumes of fixation of other producing countries. If Brazil, in theory, holds 55% of the market, then the game would be relatively balanced. Is it?
Based on the preliminary calculations we have made, the average price of sale by the funds should be between 13.56 and 13.88 cents per pound, leading us to correct what we said here a few weeks ago that the funds were making a lot of money. That is not true because the short position started to be built at 14.63 cents per pound, but it kept adding more volume between 14.30 and 13.19 and in January the funds covered part of the short sales at much higher levels. Our opinion is that only from 13.88 up will we see some reaction on the part of the funds to settle their positions for May/2018. Let’s keep an eye on it.
A trader based on NY, a long time veteran on the sugar market, who writes about the market every day, is extremely bored with the irritating interval of 250 points of the futures market over the last six months, listed a few of the words that could well define the current sugar market: sadness, pathetic, horrible, crappy, insensible, which destroys the soul and other less publishable words.
If you want to get our weekly comments on sugar straight through your email, just sign up on our site by logging onto https://archerconsulting.com.br/cadastro/.
Have a nice weekend.
Arnaldo Luiz Corrêa
