India has thrown a huge bucket of cold water on the pretensions that the futures sugar market in NY had to have some price recovery. If the subsidy of more than a billion dollars for exports were not enough, now the Indian government is signaling with a possible help increase for the 2018/2019 season. In addition, there is also the discussion about the expansion of the current minimum price. Since India will hold elections early next year, it is just natural that the campaign promises favor the sugarcane producers that represent an important part of the electorate.
Of course, the news brought down the sugar quotations at the NY exchange on Friday, when the contract for October/2018 closed the session at 11.16 cents per pound, a 4.5%-drop in the day, despite having closed the week at a slight high in comparison to the previous Friday.
Brazil is definitely the most affected by this Indian government’s attitude, because besides government subsidy and having suffered for years from the freeze/subsidy given to gas during the populist left-wing governments, the country has kept the ATR production that goes back ten running crops almost unchanged, with a huge likelihood of losing market share.
With rare and specific exceptions, nobody in the Center-South is able to produce sugar at the current prices traded in the world market. Therefore, the solution found by the Center-South mills is to maximize ethanol production, whose price is somehow aligned with the international market, decreasing sugar availability. Protectionist policies, in most cases, distort the fair market values and increase the production in the countries where they implement them, such as India and Thailand. Brazil can only complain to the WTO (World Trade Organization), but without much practical effect over the short and medium term. Meanwhile, prices have a huge downward response.
The number of contracts traded on the futures sugar market in NY last week was pretty overwhelming. Since the recent 9.91-cent-per-pound low seen on August 22 up until last Thursday’s high when October/2018 hit 11.80 cents per pound, the market has traded over three million contracts and the open position has dropped 180,000 contracts, with a probable settlement on the part of the funds. On Wednesday, 403,500 contracts were traded – the highest daily volume since September/2009.
The COT released by the CFTC, regulatory agency of the American commodities exchanges, shows that last Tuesday the funds were still short by 164,000 contracts. However, since then the open position has plummeted and the funds might still be a little over 100,000 lots short.
Despite India and the consequences that the acceleration of subsidies for sugar might have, the fact is that next year the Center-South will keep on producing just about the same amount of TRS (Total Recoverable Sugars). There seems to be no doubt the crop will be directed to the product that pays best – in this case, ethanol – and we will have a spectacular reduction in sugar availability to the world if we look at a 24-month interval. What Brazil won’t export in 24 months compared to the Brazilian average export can be equivalent to the world’s surplus. In addition to these mentioned points, there is also the possibility the economy will improve (depending on who gets elected) and we will have a sugarcane deficit to meet the internal demand. It is hard not to be constructive for 2019/2020 onward.
The fuel consumption by the Otto cycle in the 12-month accumulated has been disappointing. According to ANP data, the consumption covering the period running from August/2017 to July/2018 came to 52.26 billion liters – a significant 2.97% fall against the same period last year. It has been the greatest fall over a 12-month period since January/2004. A fall in the Otto cycle is rare to happen when the GDP is positive. Keep in mind that during last Dilma’s government (?) when the GDP was negative, the consumption in the Otto Cycle remained unchanged.
And the election martyrdom goes on. There is a reasonable risk that Brazil will elect the “lamp post” appointed by the convict Lula da Silva. A country that runs the risk of being ruled from within prison deserves if the possibility is confirmed, being called the country of outlaws. I can’t imagine what Brazil would be like with another four years under a left-wing government. Maybe George Friedman, author of the book “The Next 100 Years: A Forecast for the 21st Century”, could shed some light on this possibility. A possible election of Lula’s lamp post or Ciro Gomes will throw Brazil over the cliff, with consequences that go beyond my creativity to conjecture about.
The mills’ debt late in August, according to Archer Consulting’s findings, reached R$95.85 billion, a 12.85% increase against August last year. The real devaluation, which over twelve months dropped 20% against the dollar, is the main responsible for this increase in debt. If we estimate the Brazilian debt as being at about 600 million tons of sugarcane, the average debt of the mills is R$ 157.65 per crushed sugarcane.
The book “Derivativos Agrícolas”, written by me and journalist Carlos Raices, is already available on Amazon Books, iTunes, Google Play, Kobo, and Livraria Cultura. In Portuguese only.
Just log on to the following link:
https://itunes.apple.com/br/book/derivados-agr%C3%ADcolas/id1294585521?mt=11. Good read!
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Have a nice weekend.
Arnaldo Luiz Corrêa
