The sugar market in NY closed out Friday’s session with the contract for October/20 trading at 11.76 cents per pound, a 48-point fall against last week’s (10.50 dollars per ton). The other maturities along the curve also closed out in negative territory with greater pressure on months with shorter maturities.
The week was relatively calm, without any disturbance, with a slight improvement on the optimism towards the economy recovery and the real, for example, closed out unchanged compared to the previous week (R$5.3241). Even Bovespa, reflecting this lighter vibe, returned to the level it was at before the new coronavirus pandemic.
It’s difficult to go along with so much optimism when we don’t know yet how extensive the fall in consumption caused by the sanitary, political and economic crisis is. The estimate for the Brazilian economic slowdown for this year ranges from a 6.5% fall, according to the Focus Bulletin, released by the Brazilian Central Bank with the summary of market expectations for some indicators of the Brazilian economy, to a 9.1% tumble given by the IMF (International Monetary Fund). Some analysts believe that that will only be clearer for us by late August and early September ; while September doesn’t come around, be careful.
The fall in ethanol sales over the April/May/June quarter was 22.7% against the same period last year. Some analysts believe we will close out the crop year (which runs from April/2020 to March/2021) with an 11% fall. That’s as good a guess as any other.
Sugar exports over the same period reached 7.16 million tons, a volume 64% higher than that of the same period last year, encouraging those who bet Brazil will export more than 30 million tons of sugar this crop year. Anyway, in the twelve-month accumulated, exports come to 21.8 million tons, 13.4% higher than the accumulated of the last twelve months. Ethanol export, taking advantage of the strength of the dollar, has accumulated 2.1 billion liters over the twelve months, a volume which hadn’t been reached cumulatively since November/2016.
The numbers published by UNICA show that the total of crushed sugarcane until July 1 came to 229.4 million tons, 5.2% higher than that of the same period last year and sugar production has grown 48.75% reaching 13.3 million tons. Ethanol production has dropped by 6.6% over the period, accumulating 10 billion tons. Up to now the mix has shown 46.4% of sugar and 53.6% of ethanol, against 34.7% and 65.3%, respectively, over the same period last year.
Everybody agrees that the crop is earlier, right? If we look at how much the accumulated crushing until July 1, over the last eight crops, represented as a percentage at the end of every one of those periods, we have an average percentage of 33.4%. However, as we agree that the crop is earlier, we will use the higher average of the last 5 years, which is 39%. So, the simplistic “forecast” brings the total to 588 million tons of sugarcane. The average of the estimates of the sector, according to the site Novacana, is 599.14 billion tons; that’s just a guess.
Some banks associated with the sector have started offering NDF (Non-Deliverable Forward) again, a currency contract with cash settlement, taking into account the spread on the internal and external interest rates. Recently, as we have commented on here, there was a discount on the futures dollar rate against the spot market, showing the banks were too exposed on the American currency and didn’t want to add volatility to their portfolio and, of course, were jeopardizing the mills that wanted to fix prices for the farthest months.
Fixing sale sugar prices in real per ton for this and for the next crops is still on the agenda. The present value of these fixations has great compensation for most mills. Linearly, for the 2021/2022 crop, we have R$1,447 per FOB ton and for the next one, R$1,394 per ton. Don’t forget that by making this hedge, the mill is still exposed to the basis risk, that is, the premium or discount at which it will negotiate its sugar on the physical market.
The risk committees of the companies need to pore over many of the concepts which permeate the decision making process and review them. I have discussed this issue a lot in derivatives classes with students from all kinds of companies associated with the agribusiness. We usually see risk policies, written in stones and whose foundation is weak, set up within the companies. They use maximum percentages of fixation in a certain period of the crop without taking into account, for example, how much the result of a certain commercial operation affects the EBIT of the company.That has got to be changed.
We have been getting a lot of e-mails asking for information about the next Archer courses. The good news is that in September we will launch our already renowned Intensive Course on Futures, Options and Derivatives – Agricultural Commodities, totally online and live. It will be a six-day long course totaling eighteen hours over two consecutive weeks. We have been planning to offer this course in English too. Book your spot by sending a message to priscilla@archerconsulting.com.br. We will soon get back to you with more details and information.
Have a nice weekend everybody.
Arnaldo Luiz Corrêa
