The sugar futures market in NY closed out Friday at 12.60 cents per pound for October/2020, a 23-point drop against the previous week. Unlike the previous weeks, when the greater pressure had been on contracts with longer maturities, this time around the shorter maturities were the ones that had negative fluctuations over the week. The funds might be rolling over their long positions in October to the next maturity and this has brought a greater impact in a week when nothing interesting happened.
The highlight of the week might be the performance of the real, which appreciated 3.70% against the dollar over the week, closing out at R$5.4100 compared to last Friday’s quotation. It must have been helped by the news going around on the financial market about Bank of America betting on the appreciation of the real to R$5.200 by the end of the year. A lot of water will run under the bridge until December and there is so much futurology exercise to try and predict the next months, what with Brazil’s political instability, plus the American elections, plus the analysis of numbers on sugar and fuel consumption here and around the world, which should show the size of the hole we are trapped in, not to mention the coronavirus and its scary possible second wave.
The sugar values in NY converted into real per ton have dropped by R$85 per ton for 2020/2021, R$55 per ton for 2021/2022 and R$35 for 2022/2023. This strengthens our always strong argument that sugar fixings in real per ton have been for a long time the best choice for the mills.
The hydrous ethanol contract in B3 has been trading with an average discount of 125 points against NY equivalent to sugar. The spread between sugar and ethanol has narrowed over the last week. If it wants to, Petrobras can increase gas price up to R$0.25 per liter to stay in line with the foreign market. This possibility somehow allows for the early purchase of ethanol setting up a price support.
What’s sort of amazing is that the funds have added another 10,445 purchased lots to the position that now comes to 189,694 (a little over 9.5 million tons of equivalent sugar). Meanwhile, the market has dropped by 13 points (from Tuesday to Tuesday).
Meanwhile, the volume of fixed sugar estimated for the next harvest up until late July reaches 5,625 million tons at the average price of 12.19 cents per pound, without taking into account the polarization premium.
Estimating the Brazilian export at 25 million tons of sugar for 2021/2022, the fixing percentage is 22.5%, a number which finds no precedent compared with previous harvests, because the mills have never gotten ahead of themselves like this in order to fix a harvest that only starts next year. The average fixing value is R$1,447.60 per FOB Santos ton, equivalent to R$0.6301 per pound, both taking into account the polarization premium. Our estimate is that by late July about 5% of the 2022/2023 harvest had already been fixed by the mills.
Many traders argue that the fixing percentage released by Archer Consulting is below that of the market. I just want to remind you that models are not perfect. But in order to add some further data to the discussion, we can say that ¼ of the mills is fixed by 46%, while the remaining ¾ are fixed by about 15% (a lower percentage due to credit and contract restrictions).
So, fine – on one hand, we have the funds that are long by 9.6 million tons of sugar, plus Brazil that will still need to fix 19.4 million tons for the 2020/2021 harvest, totaling 29 million tons of sugar that will have to be settled (in the case of the funds) or sold (in the case of the mills in order to fix their sugar for export) sometime – a total of 571,000 contracts. On the other hand, who will really buy all this? This is the question we have been trying to answer for a few weeks already. We still think that the position of the funds is extremely vulnerable.
Many people on the market and in the news are betting that Minister Paulo Guedes won’t make it past late September in charge of the economy. Bolsonaro has already added fuel to the fire. Let’s see how much longer the Minister will hold up.
Registrations for the 34th Course are closed, so log onto our site (archerconsulting.com.br) to check out the new dates.
Have a nice weekend everybody.
Arnaldo Luiz Corrêa
