Sugar Market – Weekly Comment – March 5 to March 9, 2018
TOUGH MARKET FOR FLESH AND BLOOD PEOPLE
The sugar market suffered once more a steep fall during the week, trading the contract expiring in May/2018 at 12.75 cents per pound, the lowest value since June last year. The value per ton at the NY closing this Friday was R$959, also the lowest value since January and, if adjusted for the Brazilian inflation, the lowest value since June/2015. Just for the record, the adjusted average over the last eight years is R$1,308 per ton; if not adjusted, it drops to R$1,029 per ton; today we are 27% below.
India had the leading role on this steep fall of the quotations in NY with larger and larger harvest forecasts for that producer country which spurred new sales on the part of the funds. These, according to the number published this Friday, are short by 129,000 lots, or equivalent to 6.6 million tons of sugar at the average price, according to our model, of 13.92 cents per pound with an unrealized profit of US$150 million. They must have increased the position again due to the market melting on Wednesday.
As we said in a previous comment, the funds are in no hurry to liquidate their positions and, therefore, the recovery of the market should take some time. Regardless of the size of the world surplus, be it 5 or 10 million tons of sugar, the fact is that no country can produce sugar at the current NY price levels (in the Center-South the FOB Santos cost for the most efficient companies is 13.50 cents per pound, therefore, 66 points below the current price).
In commodities, under a circumstance where there is awareness of product excess in the world, it does not matter what the production cost in the short term is. It will be decisive for the next harvests not for the current one. For example, it was like this in 1999 when the production cost in the Center-South was around 6.00 cents per pound FOB and the futures market was trading at the 4.36 low. The following year, the region suffered a 22%-decrease in sugarcane production and a 26%-decrease in sugar production, crushing 205 million tons (the same production of five years earlier) compared to 264 tons in the previous harvest.
The delicate financial situation of a good part of the mills allows, due to the cash flow pressure itself, for decision-making based on panic. There are serious people who fear that the market will head for one digit. This last happened in June/2008. I don’t think this fear makes sense, just like there is no need to stand on a window sill on the last floor of a building waiting to give one step forward. Old news on a stagnant market is given new bearish clothing and validates the increase in the volumes sold by the funds. And the producers get desperate.
Meanwhile, in the real world, which will determine prices down the road, important points should be looked at carefully. The sugarcane harvest in the Center-South, whose Archer Consulting number is 580 million tons, is already above the number which starts coming out of the analysts and mills’ oven. It is headed for a much smaller number. Even the sugar mix, 41.4% according to our number, should also suffer a reduction favoring the production of ethanol.
Lower sugar prices speed up the (right) decision-making on the part of the mills to increase their mix for ethanol and in some cases negotiate the washout of sugar commercial contracts directing the sugarcane to ethanol, while we can see that the hydrous consumption grew by 45% in January-February 2018 against the same period last year and it is negotiated on the market at the equivalent of 17.50 cents per pound.
But none of these arguments is a guarantee that the prices won’t keep falling. On the other side there are the funds with their robots, algorithms and other tools which take the emotional factor out of the decision-making process. It’s a difficult moment for blood and flesh people – even more so if they have to fix prices.
The model developed by Archer Consulting shows that until the session on February 28, the mills had already hedged 11.83 million tons of sugar at the average price of 15.51 cents per pound FOB, without polarization premium, which should represent about 42.6% of the estimated total of the sugar Brazilian exports for next year.
The average fixation price, according to the model, is R$1,142 per ton, including the polarization premium and adjusted by NDF (Non-Deliverable Forward). This value is equivalent to 49.72 cents per pound. The average dollar obtained by the mill was R$3.2060. The accumulated percentage of 42.6% in the year is the lowest since 2015/2016. Last harvest, over this same period, the fixation percentage was at 52.4%.
It is important to note that if Brazil decreases its sugar exports to 24 million tons, we would already have hedged by almost 50% of the harvest, exerting less pressure on the futures market.
The rate applied by the United States on the Brazilian steel, in Professor Marcos Fava Neves’ opinion, can be good for the Brazilian agribusiness and he explains, “The United States will face retaliation from several commercial partners for having lifted this barrier. As a large Brazil’s competitor in the agribusiness exports, be it soybean, soybean meal, soybean oil, meat, cotton, among other products, then if the barriers follow this line, against the United States, this can benefit the Brazilian product”.
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
