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“When you are dead, you don’t know you are dead. It’s only
painful for others. The same applies when you are stupid.”
Ricky Gervais (1961 –    )
British actor, comedian and producer

The sugar futures market in NY closed out Friday’s session with March/21 at 14.44 cents per pound, a 38-point shrinkage against the previous Friday and representing a fall of almost 8 dollars per ton. The real kept appreciating against the dollar yet again, reflecting the macro scenario abroad with the melting of the Dollar Index (DXY) and the consistent inflow of foreign funds for the purchase of stocks at the Brazilian Exchange, whose index has already hit the pre-pandemic level.

The non-index funds carry a long position that adds up to a little over 220,000 contracts and it does not seem very easy for them right now to be able to raise the sugar market above the most desired 15 cents per pound. The purchases triggered by robotic systems and algorithms that ignore fundamentals and make us waste time trying to rationalize them, have not been enough to keep the market on that level.

As we saw last week, India Finance Minister returned the proposal the Food Processing Industry Ministry had made about the export subsidy for Indian sugar to it, without any remarks. The rejection of the Finance Minister brings to light that maxim that says that when the need comes through the door, the subsidy throws itself out of the window.

There is no way to allocate resources of more than 10,000 rupees per ton (a little over 140 dollars per ton) when the country is going through a huge fiscal crisis in the middle of a pandemic that wipes out the global economy and causes a reduction in the Indian GDP of 23.9% in the second quarter (in the third quarter the fall was 7.5%). The problem does not affect sugar only. Producers block highways protesting against the changes in the approach of the Indian government that suggests that the end of minimum prices for agricultural products might be closer than we had imagined.

Another conversation on the market is that without the Indian subsidy, the sugar price on the futures market in NY can reach 16 or 17 cents per pound. Is that really true?

Suppose you were the owner of a bakery that makes 32,000 bread rolls a day and the minimum price of the bread is 18 cents per unit. No one can sell below that price in your city. However, there is a production surplus of about 6,000 bread rolls the government will help you sell to other cities. That way it cuts the excess and keeps the minimum price unchanged.

It turns out that on the free market bread costs 14 cents per unit, but the government promises it will refund you the 4 cents for every sale you make beyond your frontiers. Other bakers did the same thing last year, but they only got 20% of the money promised by the government.

Now, you’re ready to make the same 32,000 bread rolls, but the government does not have money. What do you do? Do you try to keep the price of 18 cents or give larger and larger discounts to be able to sell your production? Do you really think the neighboring cities will increase the bread price just because you do not have help from the government anymore? It could even be plausible if world consumption were not crumbling and there was not enough bread for everybody. But I wonder if this is the case. That fact is that you’d better not wait on what this government will do and start selling your production and lock your margin.

The Indian case goes to show that the harvest started out with a carry-in inventory greater than expected. This happened due to the decrease in consumption during lockdown and especially in May, a traditional month of festivities with weddings and Ramadan, when hundreds of thousands of tons of sugar were left not consumed. Although the minimum price of sugar for sales in the country is 31,000 rupees, the mills are selling to exporters with up to 2,500-rupee discounts because they need to pay the sugarcane producers.

The market will find the balance. The world stock of sugar vis-à-vis the consumption will increase. We do not know yet how much the consumption downturn due to Covid-19 will change this relationship. The numbers were no longer good before, because world consumption had grown just 0.46% per year over the last ten years. What will the impact post-pandemic be now?

Right now, I cannot see any reasons to believe prices in NY can reach 16-17 cents per pound. What we saw over the week was the melting of the dollar to R$5.1567, a devaluation of the Brazilian currency by 3.17% in the week. The average values of sugars for the 2021/2022 and 2022/2023 harvests dropped by almost R$50 per ton in the week. And we had talked about this here dozens of times: don’t miss out on the opportunity to lock prices in real per ton.

To turn this scenario around, being less optimistic than most analysts, we would need to bring some factors together: global large-scale vaccination and in record time capable of changing the trajectory of the economy, making a consumption explosion happen, and the resumption of social mobility which would drive oil prices up and would affect the arbitrage with sugar. That’s a lot of optimism.

You know those people who think they’re better than everyone else? People who believe they are much more prepared and qualified to make important decisions? Deep down they have huge incompetence that strengthens their difficulties in recognizing their own mistakes. This phenomenon is called Dunning-Kruger. Putting someone with this profile in charge of a company, in the cockpit of a plane or sitting in the president’s chair of a country can be catastrophic. David Dunning, one of the psychologists who named this effect in a study published at the end of the century, calls this syndrome illusory superiority. Does that sound familiar, dear readers?

You all have a nice weekend.


Arnaldo Luiz Corrêa

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