The corn ethanol futures market at the American exchanges has gone up by nearly 21% over the last thirty days. Corn has gone up by more than 23%. This situation – reflect of the break of almost 9% of the corn harvest expected by the United States Department of Agriculture (USDA) – should turn into prohibitive prices for Brazil that was hoping to import ethanol from the American market in order to cater to the fuel consumer of the Brazilian northern/northeastern region.
Higher corn ethanol prices on the foreign market make way for possible export of Brazilian ethanol, now more competitive. That is, how to solve this intricate equation of ethanol supply and demand? The solution will come via price. More expensive ethanol here means less available sugar abroad.
Among the market players, the perception is that Brazil will optimize ethanol production – which is a product that provides more profitability – as much as possible. It couldn’t be any different. It remains to be seen whether we are at the production limit, that is, whether the mix limit comes close to 35%.
The physical sugar market gradually gets ahead on the situation of possible reduced availability and reflects on the spread trading between July and October at the NY exchange, which has already narrowed pretty strongly during the week. In other words, the spread narrowing denotes concern on the part of the market players about the product availability over the short term, but it could also be the reflection of the roll-over of the funds which are short and in order to push the position to the next maturity, they repurchase July and sell October affecting the spread between the two months. During the week, the volume of spread traded at the exchange exceeded 75% of all the volume traded on the day.
If, on one hand, ethanol and corn indirectly bring support for the sugar market, on the other hand, oil and gas plummet over the same period, although not in the same magnitude. The WTI and Brent oil markets dropped 13.5% and 12.5% in a month, respectively. Gas (RBOB) dropped 11.75%.
In theory, the combination of these opposing factors brought neutrality to the sugar price, because if, on one hand, the corn ethanol increase shows that the North/Northeast will have to “import” ethanol from the Center-South, cheaper gas pressures the arbitrage with ethanol at the gas station. In theory, this is because, as a market expert has rightly pointed out, the gas stations provide greater discount on consumer ethanol due to the greater margin they get from the product, compared to gas, and the turnover is greater because the consumer “visits” the gas station to fill up his car more often.
On Friday, the sugar futures market in NY ended up closing the week with July/2019 at 12.75 cents per pound, a 24-point appreciation in the week (5.30 dollars per ton), while the funds – according to a famous NY broker – must have reduced the short position by 100,000 contracts (still pretty huge).
Sugar in NY continues trading at equivalent 1,100 real per FOB ton. As long as there are still pending fixations from other maturity months which have been rolled over to July and October so as to take advantage of possible market recovery; we will see some price pressure around R$1,150 -1,200, which can limit possible price recovery. However, we believe that as crushing evolves and the clearer it gets regarding the production mix, the actual sugarcane volume, and the ATR below the expectation, the market should go for 14 or, who knows, even 15 cents per pound in the last quarter of the year.
To the mills, the agenda is to stay tuned for the dollar and the opportunities of pricing at the price peaks. The industrial consumers have a great opportunity to fix the price on raw material and/or decrease the cost of acquisition via puts sale at out-of-the-money exercise price.
A possible oil price recovery on the foreign market can drive up gas import price and ethanol can change price levels domestically despite the full harvest. We said here that staying sold short at 12 cents per pound would call for a high dosage of courage.
Did you know that 1,000 professionals on the commodities market have already attended what they think it the best course on agricultural derivatives in Brazil? Don’t leave it to the last minute – after this one, only next year. The 32nd Intensive Course on Futures, Options and Derivatives – Agricultural Commodities will take place on August 27 (Tuesday), 28 (Wednesday) and 29 (Thursday), 2019 in São Paulo, SP at the Hotel Wall Street near Paulista.
Everybody have a nice weekend.
Arnaldo Luiz Corrêa
