Sugar closed the week at 10.40 cents per pound in NY, a 10-point fall against the previous week, or about US$2.20 per ton. In reals, sugar closed at R$20 per ton above last week – nothing very significant.
The non-index funds increased their short positions by 19,500 contracts and now, at least up until last Tuesday, when the report by CFTC was made, add up to 40,500 sold contracts, or about 2 million tons of equivalent sugar. It’s just some more negative news to be digested by the market.
Oil is in this indigestible bowl and it reached the lowest price since November 2001 on Friday, ending up trading at 17.33 dollars per barrel. That is, the long-awaited deal, prematurely celebrated by Trump and where the OPEC producers would cut down on the daily offer by 10 million barrels, didn’t have the expected outcome.
In addition to the oil price collapse, increased by the coronavirus pandemic, the market will have to cope with the plummeting fuel consumption in the United States and the production of corn ethanol shrinking right when the quotes of the corn contract in Chicago reach the lowest price over the last thirteen years.
Corn in Brazil, whose market has a distinct dynamic, makes domestic price hold out just enough to make investments on corn ethanol manufacturing projects for the mid-term unfeasible. That is, those additional 2.5 billion liters of corn ethanol, which the market was expecting this year, is jeopardized by at least 600 million liters.
In the same container of this recipe for disaster, we also find the dark perspective of an unprecedented shrinking of the global economy, which can bring back the Great Depression of 1929. As I write this text, it looks like the social isolation in Brazil might go on until early May, which comes to a total of 51 paralyzed days in the year. Analysts forecast a 5.5% GDP drop. How will this impact the sugar-energy sector?
The first Archer estimate for the 2020/2021 crop in the Center-South points to a production of 596 million tons of sugarcane split between 35.8 million tons of sugar and 26.2 billion liters of ethanol. This volume of sugarcane is 2.25% above the 19/20 harvest which, according to the last UNICA report, reached 582.9 million tons of sugarcane.
We will produce 7.3 million tons of sugar more than we did last year. Of course, a great part of this sugar isn’t hedged and won’t necessarily find a buyer out there for it all. Presumably, the sugar carry-over stocks at the end of this year will be high in comparison to previous years.
The slump in processed foods and beverages, lower activity in the world trade and the tendency for end consumers to preliminarily absorb the stock they have before originating new purchases should push the sugar price on the domestic market down.
We have warned that the estimated volume of sugar production for this year might change depending on the development of the current crisis. We might see an even higher increase in sugar production than the number mentioned above against ethanol, which pays less, and also a decrease in the total amount of sugarcane to be crushed by some mills, which might not be able to crush that which was previously forecast because of financial problems.
Changing this dark and gray scenario to brighter colors will take a lot of optimism. What we see is that the worse the situation gets over the long term, the more jeopardized the product availability ahead will be. The shale industry is in great difficulty in the USA after the oil price collapse. Several platforms are being closed down due to economic unfeasibility. This must represent the equivalent of two million barrels a day.
After the global tsunami is gone and life gets back to its normal path, what is left from our sector is an industry which didn’t expand as much as it needed, didn’t invest because there was no money left, didn’t renovate because the uncertainly increased and will have enormous difficulty meeting demand over the next 2 years, already foreseeing that a lot of market players will be excluded due to financial insufficiency. The coronavirus will kill a lot of people, metaphorically speaking.
Maybe the ethanol market will breathe a little more easily in the second semester. We estimate that the anhydrous production should decrease by about 9% against the 19/20 crop, reaching 9 billion liters. Hydrous should respond to a total production of 17,172 billion liters drying up more than 25% of the volume produced last year. It will make a lot of sense for the mills that have positive cash flow and tanking capacity to store ethanol for the last quarter of the year.
The sector hopes the government can pass a credit line for ethanol storage. That way the mills can postpone the entry of the product to the market, easing up the pressure of the start of the crop and anticipating resources to meet the immediate cash flow needs.
We will still have a lot of intense days ahead to know the true dimension of the crisis challenging us. Nobody can say for sure how big all these problems we are facing are. The market agonizes over the uncertainties and the volatility reflects the insecurity of its agents. We must be calm and not act impulsively. Making calculations helps a lot. I remember a market executive’s words, pretty pertinent to the current moment, “nobody needs to hurry to do some bad business”.
Have a nice weekend.
Arnaldo Luiz Corrêa
