“Politicians divide humanity into two groups:
the fools and the foes.”
Friedrich Nietzsche (1844-1900)
German philosopher
The sugar futures market in NY closed the week with July/2020 at 11.88 cents per pound, a 3-dollar drop per ton. The great drop in contract quotes of July and October/2022, which plummeted 11 dollars per ton probably due to the anticipation of the mills which are fixing prices for later, is striking. The linear average of the drop for the 20/21 crop of the Center-South was 10 points (2.20 dollars per ton). The 21/22 crop dropped 3.75 dollars per ton and the 22/23 crop dropped nearly 9 dollars per ton.
For some weeks now we have shown our concern over the recent recovery seen in sugar prices on the world market as well as over the appreciation of the real against the dollar, having even pointed out that we didn’t have a full understanding of the reasons for this sudden improvement as the fundamentals are still bad. The market corrected itself this week.
Our point was, and still is, that the global economic situation requires special care, especially when we see renewed forecasts which highlight the size of the hole the world consumption is in.
The opening of the American economy misled us and what followed were peaks in the number of cases in Florida and California. Signs of a possible second wave of COVID-19 contamination spread across the global markets last Thursday (a holiday in Brazil) and brought down sugar with it.
Over the week that ended on Friday, the commodities, in general, took a tumble following the path gone down by the risk assets. It was an extensive fall: coffee and soybean – 2%; soybean oil, natural gas, wheat, and cocoa – 3% on average, and the energy market led the way between a 7 and 8% fall: gas, WTI oil, and Brent.
Forecasts are already usually difficult to make when things are running smoothly, so just imagine doing that in the midst of so much turbulence. Focusing on sugar pricing has been our mantra for months and the mills which did so are relieved. The real has devalued against the dollar again, closing the week at 5.0516 – a 2% drop. The average linear FOB value for the 2021/2022 crop was at R$1,428 per ton. Some mills were able to get prices above R$1,500 and that was just a short while ago.
As we said last week, we are all groping the market in total darkness. We don’t have a behavior pattern that allows us to look back and identify with past events. This is an unprecedented situation. A health crisis, a world economy meltdown (a 6% fall in the United States GDP, more than 8% in the Eurozone and 8.7% in the United Kingdom), oil under huge pressure due to demand depletion, a huge uncertainty whether COVID-19 will have a second wave and, as if that was not enough, having to deal with authoritarian governments are all mixed together.
Forecasting without having a pattern is an impossible task. Today, the best the mills have at hand is hedging sugar in NY converting it into real per ton. The values are profitable and way above the production cost (cash cost) of the more efficient mills. The downside risk is a fast oil price hike together with a devaluation of the real against the American currency. Even so, this event would improve the return of the unsold ethanol.
A great financial group headquartered in NY predicts that over the next three months sugar should be between 10 and 12 cents per pound. Other analysts dream about 14 cents per pound as early as July. Pick the one that pleases you more and draw up your strategy. Opposing opinions build up the market.
About two years ago in São Paulo, in one of the semester courses on derivatives we have been continuously holding over the last sixteen years – now put on hold due to COVID-19 – one of the students, taking the floor for his final considerations on the last day of the course coined a phrase which I found brilliant. He said, “Sir, before this course I didn’t know what I didn’t know; now I already know what I don’t know.” We already know what we don’t know.
A red light goes on: Professor Delfim Neto believes that in August Brazil will have 25 million unemployed people because of the deep recession which hasn’t entirely been seen yet, and he projects at least an 8% fall, which is the worst performance of the Brazilian Republican history.
Meanwhile, there has been no strategy on the part of the Palácio do Planalto to soothe this tsunami, unfortunately. President Bolsonaro doesn’t act, doesn’t sympathize with the deaths and wastes his time and exhausts his political capital fostering and causing more and more crises. Out of the main leaders of the world economies, he is the only one who has lost popularity over the pandemic. Brazil’s image abroad, exactly because of the scabrous positions taken by the president in light of the coronavirus, is only better than that of Belarus (the last European dictator in power for 25 years) or that of Turkmenistan (whose president is for life). He (Bolsonaro) has been really trying our patience.
Have a nice weekend everybody.
Arnaldo Luiz Corrêa
