The sugar futures market in NY closed Friday’s session with the contract for May/2019 at 12.75 cents per pound, a 20-point high against the previous week. The market tried to break the 13 cents per pound, but it didn’t manage to yet again. The week’s closing, together with the dollar at R$3.8730 is equal to R$1,134 per FOB ton – keep this number in mind.
In the last five crops, from 2014/15 to 2018/19, which is ending now, the average closing value in NY converted into real and financially updated for the inflation rate is R$1,334 per ton. That is, the current price is off by 15% against the average. If we consider that the fundamentals tend to strengthen as we get into the new season and the perception of less sugar availability becomes clearer, NY should – in thesis – start to search for higher levels.
We already knew this would be a year marked by volatility and everything leads us to believe that the prophecy will prove to be true. No country can produce sugar at the current price levels. While Brazil’s most efficient mills can produce sugar at the cash-flow cost (financial costs free) at about 9.10 cents per pound ex-mill, in Thailand this cost soars to 13.27, in Europe to 16.17 and in India to 17.20 cents per pound!!!
We see a crop reduction in Europe, with many refineries presenting appalling results in the balance sheets, shaking the corporate structures. The same goes for the trading companies that reduce their workforce, change their trading desk, in order to reduce costs and increase efficiency at times of narrow margins and large risks – the sugar world will change fast.
Going back to the averages, in the first quartile we find R$1,131 per ton (adjusted price for the inflation rate). This means that in just 25% of the times, over the last five years, the market has traded below it (and we are precisely at this level as shown on the first paragraph). Would it make sense for sugar to trade below this value under the situation the market is now, with the perspective of reduction in sugar availability in the Center-South? It doesn’t seem so. In 50% of the times the market trades between R$1,131 and R$1,579 per ton. In only 25% of the times does it trade above R$1,579. In other words, pricing now would mean closing the eyes to an eventual price recovery. That’s why last week we recommended that those who hadn’t fixed in May roll it over to the next maturity.
India is moving toward a production of 32.6 million tons of sugar, slightly above what the market had predicted. However, it is believed that the 2019/2020 harvest will be smaller. The same should happen to Thailand. Brazilian sugar exports in 12 running months add up to 20.6 million tons, a volume 25% smaller than that of the same period last year. Over 24 months, Brazilian export has come to 48.3 million tons of sugar. When we look at the volume of two years, it gives us a broader vision of how much sugar Brazil has taken out of the world trade and/or how much other countries would need to supply with regard to volume. This volume (48.3) has been the smallest since 2010. On average, over 10 years, the volume of Brazilian sugar covering a period of 24 months has been 50.7 million tons of sugar. Where are we headed though?
This is a million dollar question. This year, given the limited sugar production (Center-South with less than 27 million tons of sugar), the estimate is that Brazil will export 21 million tons. We will get to March/2020 with a 24-month accumulated export of 41 million tons. When did this happen last? It was ten years ago. Take into account the average of 10 years of 50.7 million tons (as we mentioned above) and compare that to 41 million tons in March/2020. Who will supply in the end? How will prices react?
If we look at some comments from a few months ago, we will see that the only factors that can determine a decline in sugar prices on the foreign market are oil price (say, WTI below 50 dollars per barrel) and the steep devaluation of the real. But, despite the risk of staying short at these levels, the funds shrug it off and have a short position of more than 100,000 lots (equivalent to the Brazilian export of three months). Any spark on this market can have fatal consequences (for the funds, of course).
Archer Consulting released this week the first estimate for the sugarcane harvest in the Center=South. Our estimate is 572 million tons of sugarcane – a slight increase against last year’s production (not yet totaled, but expected to be around 565 million tons of sugarcane). We believe that the aging of the sugarcane field, the lack of new investments, the scant expansion of the cultivated area, in addition to the scarce cultural treatment encouraged by the lack of money will reduce the ATR to 136.95 Kg (last harvest 138.36). The production of sugar in the Center-South is estimated at 26,871 million tons of sugar and that of ethanol comes to 29.5 billion liters.
We estimate that the mills are fixed at 10.2 million tons of sugar for the 2019/2020 harvest, which represents 48.61% of the 21 million tons of sugar Brazil should export this year. Of course, this export number might be smaller due to this year’s smaller production. The average price obtained by the mills, according to our model, is 13.08 cents per FOB pound, with polarization premium. In real, we estimate that the pricing represents 1,163.49 real per FOB ton with POL.
Have you set aside the date on your calendar? The 32nd Intensive Course on Futures, Options and Derivatives – Agricultural Commodities, which has already gone over 1,000 students, will take place on August 27 (Tuesday), 28 (Wednesday) and 29 (Thursday), 2019 in São Paulo, SP at the Hotel Wall Street near Paulista. Don’t leave it to the last minute.
Have a great weekend.
Arnaldo Luiz Corrêa
