The week was made shorter due to the national holiday in the United States (Memorial Day) on Monday. The sugar futures market in NY stayed pretty much unchanged against the previous week. July/20 closed at 10.93 cents per pound, which was the same level as last Friday’s. Now, the forward contracts, probably reflecting the pricing movement on the part of the traders (mills?), closed weaker by up to 6 dollars per ton in the week.
Surprisingly and despite the tense political situation, the real closed the week at R$5.33, appreciating by almost 4% against the American currency.
The tension between the United States and China makes the market uneasy with huge negative effects on risk assets, especially on energy and soft commodities. President Trump came down hard on China Friday and accused it of various crimes such as industrial espionage and freedom violations as well as “ripped off the United States like no one has ever done before”.
We will just find out how big this mess is next week since the market had already closed when Trump spoke to the press. All Brazil has to do is hope our tactless Foreign Minister won’t jump on this bandwagon and get involved in this fight of giants. China should retaliate against the United States, which will greatly affect many American companies which depend on the supply of parts and pieces made in that country.
There are still a lot of questions regarding the extent of the problems the pandemic has caused and should still cause on the Brazilian economy. The early projections of a 5.5% retraction of the GDP have been changed every week and some banks are already working with an economy contraction of about 7% with a downward bias. The domestic political situation, which causes the foreign investor to look at the country very carefully due to legal uncertainty, which affects the exchange rate, increases the risk spread, mops up the credit and pushes an eventual economic recovery further down the lane, should play a great part in this perception of the resurgence of the fall. That is, the pandemic isn’t the only key player in this crisis situation. There is also the political inability of our leaders.
The volume of sugar Brazil will export this 2020/2021 crop (period running from May/2020 to April/2021) has been one of the subject topics most commented on among the traders. We have already heard of pretty robust numbers – above 30 million tons. We cannot afford to be unaware of these pieces of information, but the point is: will that be possible?
Well, there is a difference between what is possible and what is probable. Possible is everything that can happen because, after all, Brazil has the logistic capacity to market this amount of sugar and it can also produce enough sugar to reach this volume. In short, it’s possible, but is it probable? Probable is something that will certainly happen.
Over the last twelve months, Brazil has exported 19.3 million tons of sugar. In order to reach 30 million tons some traders bet on (they really do!!! Dinners, boxes of wine, and so on) we would have to grow 10.3 million tons of sugar in twelve months.
When have we been able to increase exports at this volume in just twelve months? Never – the maximum we have been able to increase within a period of twelve months was 7.2 million tons almost seven years ago. Let’s forget the absolute numbers and let’s look at the relative numbers. We’re talking about a 55% percent increase. In this case, there have already been precedents. In 2001, Brazilian exports (December/2001 x December/2000) grew by 71%, though with only a 4.5 million-ton difference.
Some might think that this is a weak argument, that is, they believe in export of 30 million tons and that is that, because nothing prevents the great trading companies from just making robust deliveries on the expiration of the futures contracts of July and October and exporting all the produced surplus – is it possible? Yes. Is it probable? No.
What is Brazil’s sugar export record? 29.78 million tons in October/2017. Is it reasonable to assume that we will export 30 million tons in the middle of a world crisis with consumption retraction, world economic downturn, revenue slump among other factors? Make your bets. I’ve already made mine.
The seventh Archer Consulting estimate of the pricing volume of the export contracts of the mills for the 2020/2021 crop up until April 30/2020 reveals that 19.2 million tons had already been fixed. Since we revised the Brazilian sugar export estimate for the 2020/2021 crop to 23.5 million tons, we can say that 81.7% of the estimated export volume is already priced, the greatest percentage of the last five years.
The average value of the fixations is 13.11 cents per pound or 56.47 cents of real per pound (both without pol), equivalent to R$1,297 per FOB Santos ton (with pol). The average dollar for April/20, reflecting the pandemic, the world recession, and the political crisis caused by Bolsonaro’s government, has gone up to R$5.3270, 8.8% above the March average. The average price of NY’s closing in April was 10.50 cents per pound, 175 points below February average, a sharp downturn of almost 39 dollars per ton in the month.
What’s ahead for us in 2020 can start showing as of next week. What the Chinese response to Trump’s harsh words will be is every market analyst’s expectation. Meanwhile, according to the British press, the tension at the borders of India and China is increasing, even with troop movements.
Meanwhile, in Brazil, we, unfortunately, see a country deep in petty and minor issues, without any planning, reforms, perspective. Just a president without the slightest democratic quality, without any negotiation skills, focused on protecting his surroundings. We are all aboard the Titanic, heading toward an iceberg, having a crazy Napoleon in charge. Will that possibly work out? Yes. Will that probably work out? Of course, it won’t.
Have a nice weekend everybody.
Arnaldo Luiz Corrêa
