The sugar market closed Friday at 12.60 cents per pound after a week where we could see nothingness in its totality. The market movement is brought on by the spreads and reheated or adapted news according to customers’ taste. I sympathize with those news agency journalists forced to write about nothing every day.
The lack of rainfall in the most important sugarcane belt in the country starts to get the agricultural area of the mills worried while at the same time their managers are reluctant to admit to the senior management of the company that a sharp reduction in the sugarcane availability is imminent. Whoever covered the region recently realized that in many sugarcane fields the sugarcane is stressed due to the lack of water despite the good rainfall in November. The rainfall level seen in January that just ended was worrying. Regions such as Ribeirão Preto, Rio Preto, and Jaboticabal got less than 35% of the level of January/2018. Uberaba and Tupaciguara, both in the state of Minas Gerais, got less than 30% of the rainfall of the previous year. The agricultural managers scratch their heads and pin their hopes on the rainfall expected in the upcoming week.
A stressed sugarcane field due to the lack of rainfall and the sharp reduction in the cultural practices due to the tight cash flow – caused by a hard year for the commercialization of sugar – are infallible elements for the fall in productivity. Therefore, a lower ATR for the harvest starting in March (for the mills demanding more pressing financial resources) and in April (for those with their finances in order)is expected. Less sugarcane to be crushed sheds doubt on the actual sugar availability to be commercialized or fixed against the NY contract maturing in May/2019. The available volume in the physical might be surprisingly reduced having clear effects on the negotiation of the May/July spread. It’s worth staying tuned.
If the situation is uncomfortable as far as the supply goes, when it comes to the demand the wind blows to a vigorous increase in consumption for both sugar on the domestic market and ethanol. And the carryover stocks for both products are pretty narrow.
The licensing of light vehicles in 2018 reached 2.46 million units, an invigorating increase of 12% against the previous year. It’s estimated that in 2019, given the expectation of the Brazilian economy recovery, another 2.7 million will be licensed. That’s to say that at the end of the current year we will have, discounting the scrapping rate, an additional fleet of 3.5 million units that consume, according to BioAgência, 1,419 liters of fuel per year.
In addition to these new incoming units, the consumer, who pulled the handbrake when filling up the tank of his car at the gas stations, frightened by the high gas prices in the second half of 2018, is slowly returning to the consumption seen before this event as the gas stations reduce the prices in line with the foreign parity. Therefore, it’s pretty reasonable to consider that during this year we will have an increase in the Otto cycle consumption between 5 and 6% against last year. The good news is that the market share won by hydrous because of more competitive prices than those of gas will unlikely migrate back to it.
The food and beverage industries are more optimistic about the perspective of income recovery. Its effect will start to be felt soon and, in our opinion, sugar on the domestic market will negotiate at a premium over NY. They have to stay tuned, however, for possible opportunities for raw material fixation.
The general picture for this year as far as consumption goes, as noted, is promising. It’s very evident that in the foreign scenario we will have an imbalance between supply and demand which will be made worse when the production number from India, Thailand and European Union confirm a much higher reduction in sugar availability than what the market had predicted.
What can change this constructive picture is the erratic behavior of oil along with or not with an eventual optimism in the Brazilian economy which overvalues the real. In this case, we would have a very bad scenario for the mills, resulting in lower gas in real and an increase in sugar availability.
With regard to the oil and the sharp drop of 40% on the foreign market in just three months, I borrow an excerpt of the article by the economist José Roberto Mendonça de Barros published in last Sunday’s issue of the O Estado de São Paulo newspaper. An expert in explaining complex things in a simple way, the professor summed up, “The volatility of the markets taught the oil producers to hold good margins, buying put options when the quotations reach high levels, especially if there are doubts about its maintenance, which occurred with oil through the review of the future of the global growth. On the commodities markets, the reversal of the expectations leads to the settlement of options at any price, which makes the market sink. After the positions have been zeroed out, calmness returns and prices can even go up a little, which also occurred in this case. It’s heart-stopping…money so as not to go bankrupt and the painful memory that there is no doctor on the market”. He said it all.
In a scenario like the one described above, an alternative for the mills would be to take out insurance against the price fall in the oil barrel in real.
A fervent Catholic mill owner has recently been to the Vatican. There’s talk that he went there to ask Pope Francisco to intercede with the Creator for sugar prices to improve. The fact is that he was there, at an audience before the Supreme Pontiff, personal and non-transferable invitation, at an amphitheater with a hundred other people. Sometimes the internal cameras would show on the big screen the manifestation of the excitement of those present, in ecstasy with the Pope’s presence. It’s a place for reflection, forgiveness towards enemies, prayers, and penance, right? Well, kind of. What happened was that in the row behind where the mill owner had sat down, a woman in a red T-shirt threatened to hold up a poster that read Lula Free so it would show on the screen, which was immediately prevented by the mill owner after a heated mayhem. I don’t know whether he had enough time to finish his prayers, but I fear for the sugar market.
The XXXI Intensive Course on Futures, Options and Derivatives in Agricultural Commodities will be held 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). The number of spots is limited. For further information, send an email to priscilla@archerconsulting.com.br. We recommend that the participant read the book Derivativos Agrícolas (Agricultural Derivatives), 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
