“Take care of the cents, because the millions can take care of themselves”
William Lowndes (1652-1724)
British politician from the Liberal Party
The political tensions between the United States and China brought the oil prices down early on Friday, with the WTI ending up trading at 30.71 dollars per barrel recovering at the end of the session and closing the week at 33.54 dollars, which represents a 13% increase against the previous week. The same occurred with the futures sugar market in NY, which closed Friday trading a little below 11 cents per pound, appreciating a little more than 13 dollars per ton against last week.
Did this week have less volatility? Can we get excited and believe in a market recovery? I don’t think so just yet. Though the weekly variation of the sugar has been positive all along the price curve in NY, appreciating from 9 to 13 dollars per ton in the week and even with the real appreciating against the American currency closing near the minimum R$5.5341, news about the huge consumption downturn coming from several directions can affect market prices and moods even more in the weeks ahead.
The car industry in Brazil has claimed a 40% reduction in new vehicles sale in 2020. Those who were planning on changing cars will hold off on it for quite a while. So, we estimate the Brazilian fleet of light vehicles, which should close 2020 at 38.7 million vehicles, will at best come close to 38 million, cutting the consumption in the Otto Cycle by over 800 million liters of fuel.
The world consumption of sugar can also have a further decline than that expected by the market. India, for instance, projects that the pandemic will reduce that country’s consumption by 2 million tons of sugar. May is usually fruitful in terms of sugar consumption in India due to the festivities (lots of weddings take place during this month) and this time around on top of that there is also Ramadan. In a country with 150 million Muslims, Ramadan festivities end this Saturday after 30 days and the pandemic has affected the consumption.
Most market analysts start revising their estimates about the sugar production for this harvest upward. The numbers are over 37 million tons (the first Archer Consulting estimate is 35.6 million tons). On the other hand, when we analyze accumulated Brazilian exports over the last twelve months -19.4 million tons – one has to try really hard to believe that the world market will give the sugar surplus to be produced this year – about 9 million tons – a shelter with open arms. It won’t.
Brazil will undoubtedly fill a great part of the void left by India and Thailand, but it won’t be able to finish the harvest exporting 28 million tons of sugar. The average of Brazilian exports accumulated over twelve months in the last ten years has been 25 million tons of sugar. Our number is close to 23.5 million tons.
According to estimates by the Intelligence Unit of the English magazine The Economist, the economy of the Eurozone should shrink by 6.9% this year. In the United Kingdom, an 8.7% fall is expected. The United States, whose number of unemployed people over nine weeks has escalated to over 38 million, should shrink by 3.8%, while Brazil should suffer a 5.5% reduction in economic activity. This disheartening scenario could hardly support an extraordinary growth in sugar exports. It is a global meltdown.
No wonder better-organized mills, those which are structurally and financially, so to speak, in the first quartile of the sector, speed up the fixations of export sugar taking advantage of the excellent prices obtained from the futures NY hedge and the exchange rate.
According to Friday’s closing, the simple average of the months for the 2021/2022 harvest adjusted to present value by the SELIC rate (Special Custodial and Clearing managed by Brazilian Central Bank) settled the equivalent to R$1,432 per FOB Santos ton. In our opinion, with the drastic reduction in the expected fuel consumption for this year in the country in addition to the shrinking in domestic sugar demand because of the fall in household income, it is just natural that there is a sugar surplus at the end of this harvest. It’s a carry-over that is forecast to be high and that might greatly pressure the prices in the last quarter of the year, especially if the estimates made by renowned economists that the worst is yet to come are confirmed, and if there is a worsening of the companies’ health.
The market can, however, wait for a miracle. The discovery and immediate provision – at a low cost – of a vaccine that can immunize and bring the world back to the past is always hope. Up until now, this is only wishful thinking.
The non-indexed funds have reduced their short positions and now have only 10,500 short sold contracts. They might have reduced them even further because this number refers to last Tuesday.
The recent performance of sugar can be considered dazzling. On April 28 it was trading at 9.05 cents per pound and this Friday it closed at 10.99 cents per pound. It was a wonderful recovery, though past fundamentals eclipsed by the world pandemic recommend that we now take advantage of good prices.
An industrial consumer told me that he regrets not having making any purchase when the market was orbiting 9.00-9.25 cents per pound. Rarely have we seen the futures sugar market in NY go below 9.50 cents per pound for a long period of time. This has happened only in times of huge fundamental rupture or chaotic situations, usually caused by exogenous factors.
From 2011 up until now, NY has been above 9.50 cents per pound in 99.9% of the time. That’s right; you read it right – 99.9% of the time. If you prefer a longer record, since 2000, NY has been above 9.50 cents per pound in 74.36% of the time. Even so, many industrial consumers don’t get excited about protecting themselves when the market hits this level.
Brazilian left-wing has turned into an unburied corpse. This week Lula and Dilma streamed a live over the Internet to cheer up the bunch of protozoa that still keeping drooling over them. There were less than 1,000 people on Lula’s live and a little over 400 on Dilma’s. The 2022 elections, which are still far away but are starting to heat up fed by the ineptitude and absence of a robust government plan by president Bolsonaro, should concentrate on the extreme right, right, and center-right. Let’s try and survive until then.
Have a nice weekend everybody.
Arnaldo Luiz Corrêa
