Articles

Sugar

THE MARKET STILL NEEDS CONSOLIDATION
05/10/2018

Two amazing things in the week that just ended: the strong performance of the sugar market, when March/2019 closed Friday at 12.60 cents per pound and the position of the funds, which unlike what was expected, added more contracts to the already huge short position.

The March/2019 until March/2020 trading months which cover the fixation period corresponding to the Center-South 2019/2020 crop went up by 30 dollars per ton in the week on average. Less than ten days ago the market was trading below 10 cents per pound, in the first trading month, and with all this upward drive, the funds still increased their short position by 11,000 lots.

A lot of water will still go under the bridge, but those who follow us can testify that we have said here several times that the prices would start recovering in the last quarter of the year, but we couldn’t imagine that the recovery would already come in early October. But it is still early for the consolidation. The main reason is we are still crushing sugarcane and the final crop number hasn’t closed yet, evidently.

However, there are several things working in favor of a meaningful market improvement. They are:

• The production of sugarcane in the Center-South is coming close to a volume lower than 550 million tons;

• Nine out of ten mills we have talked to don’t believe we will have more sugarcane next year. Though premature, the forecast is around 540 million tons of sugarcane for 2019/2020;

• Oil seems to want to stay above 80 dollars per barrel; this supports hydrous ethanol, via parity with sugar, and therefore…

• Increases the perspective that the next crop mix will be much more in favor of ethanol-producing;

• Since Brazil will export less in 2019/2020 (see the fixation estimate below), the selling pressure can be smaller;

• Ethanol prices in the off-season can reach values above R$2.4500 per liter and for sugar prices  to be appealing enough for the mills to reflect on producing more sugar for the next harvest, late this year NY will need to go for 13.50 cents per pound at least;

• The election of a president with a liberal slant reasserts that Petrobras should continue with the fuel pricing policy following the foreign market;

• The position of the funds, although they are in no hurry to liquidate it, can ultimately be explosive if some exogenous factor affects the sugar and adds on the buying back of the positions;

• India might take a while before it exports the subsidized sugar and the market might get distressed if the decrease in the availability of Brazil is taken seriously.

• An eventual growth of the Brazilian economy next year will put together a long-dammed consumption of the food industry, a meaningful increase in the light vehicles sale (this year we should close at 15% above 2017) which will show us that there isn’t enough sugarcane to meet the domestic industrial sugar market and for the fuel consumption.

The fixation estimate of the mills, based on August 31, 2018, suggests that 2,824 million tons of sugar from the 2019/2020 harvest were already fixed up until that date. If we assume that Brazil should export 21 million tons of sugar next year, then 13.45% of the harvest would already be fixed. The average value of fixations is at 13.27 cents per pound polarization premium-free, equivalent to 49.96 cents per pound. The average value of harvest fixation is R$1,147.59 per Santos FOB equivalent ton, with the polarization premium already included.

Brazil will go to the polls this Sunday to choose its next president. Never before has the country been so divided and so polarized.  Nerves are on edge and what we see are friends breaking off friendships on social media, intolerance among family members who oppose one another and an outpouring of insults and foul language bordering on savagery. This is the heritage left by the criminal organization which goes by the name of Workers’ Party. What was to be an election where the best among the best is chosen has turned into a referendum where the voter will have to choose whether he wants the criminal group that has ripped off the country over the last sixteen years to continue in power easily robbing or not. It is hard to stay optimistic given this current state of affairs.

Registrations for the XXXI Intensive Course on Futures, Options and Derivatives in Agricultural Commodities, which will take place on March 19 (Tuesday), March 20 (Wednesday) and March 21 (Thursday), 2019 at the Hotel Paulista Wall Street, in Bela Vista, in São Paulo (SP), are open. For further information, send an email to priscilla@archerconsulting.com.br. We recommend that the participant read the book Derivativos Agrícolas, which can be found at iTunes, Amazon, Livraria Cultura or www.estantevirtual.com.br, before attending the course.

Have a nice weekend.

Arnaldo Luiz Corrêa

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