The sugar futures market in NY closed out the week at 15.77 cents per pound for May/2021, an almost 8-dollar drop per ton over the week and 63-real shrinkage per ton on a price average converted into real of contract closures that correspond to the 2021/2022 crop (from May/2021 to March/2022). For the next crop, the market virtually closed out the week unchanged in cents per pound, but 26 real per ton weaker.
The energy market melted over the week, not only for having artificially increased before fostered by speculative funds, but by the counterpoint to the consumption reality of fuels around the world due to the lockdown that advances in countries in Europe in the third wave of covid-19. Over the week, gas plummeted 9.4% also making Petrobras reduce the fuel price in the refinery this Friday. WTI and Brent oil also shrank by 7% on average. It wasn’t a particularly favorable week for the soft commodities; coffee, sugar, cotton and cocoa all closed out the week in the red. Grains also dropped with less intensity. The so-called new cycle of commodities will take a little longer to re-emerge.
On the ethanol market, something nobody was expecting. The mills that “didn’t believe in elves with golden pots”, as an ethanol trader told me, took advantage of the highly profitable hydrous prices and zeroed out their stocks close to R$3.5500/3.600 per liter with taxes (at that moment it was like selling sugar at 14.50 cents per pound, a discount of 100/120 points against NY).
The ethanol buyer has vanished and the nominal market must have a discount equivalent to 250/300 points against sugar. What caused this sharp price drop were the expectations of a weak demand due to the mobility restrictions imposed by the pandemic – everybody at home; bars, restaurants, beaches being closed and the downsizing of the availability of leisure activities. Without vaccine, there’s no way for the economy to take off. And fuel consumption points downwards.
I just want to point out that we have been talking about this nonstop, debating on how prices could trade above 17-18 cents per pound, and how, actually, they have, bearing in mind the disastrous situation the world economy and the Brazilian economy have been going through. Here, for instance, only in the parallel world where Paulo Guedes lives is where we see “signs of recovery all over the place”, as the minister put it last week. In the real world, we are like that boy in the movie Sixth Sense, “I see dead people”. And Brazil is coming to 300,000 deaths due to the pandemic. Where is this recovery?
As for sugar, the futures curve in real per ton contributes to intensifying that feeling of regret for having fixed sugar before – as if it would be possible for someone to predict the price trajectory. Read Taleb about it. Nobody breaks with profit in the pocket. And there’s no point looking back and grumbling that if you had waited longer, you could have fixed sugar better. This is the great dilemma of the hedge and the great fear of the risk manager when he has to explain that to the committees.
Everybody is smart after the event has occurred. But when a decision has to be made to ensure the EBITDA of the company, the decision maker is a lonely professional. If he got it right, he did his job. If he got it wrong (and making a mistake here is in the context of the market going against him, despite the fact the operation has had positive result) the world falls on his head. This is how it’s been since the beginning of time.
An attentive reader and a well-known market executive called my attention to a really relevant fact after learning about the significant volume of sugar fixed for export this crop that is starting now. If 85% of the sugar to be exported in the 2021/2022 crop is fixed at R$1.640 per FOB ton on average, “the supposition of a maximum mix of sugar can be a fallacy” he said. “The price curve for hydrous ethanol, expected by great part of the analysts, is above this value, which can foster the appearance of washout operations (agreement between the parties for the breach of contract) during the crop”.
It’s clear that the feasibility of such strategy depends on other factors: if the mill has locked up the hedge in real per ton in the trading company’s account, the operation is unfeasible, because the difference the mill would have to pay for the trading company, in real per ton, to cancel the contract, wouldn’t make up for the additional value it would pocket from the hydrous sale. However, for operations where the parties exchange futures for the fixation of contracts through EFP, there is this possibility. With hydrous falling now, the operation kind of loses appeal.
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In May/2004, the American journalist Larry Rohter, who was then a correspondent for the New York Times in Brazil, was threatened to lose his residence visa for having said that the excessive alcohol was affecting Lula. The text said that Lula’s eyes and cheeks were invariably red, but nobody around him had the nerve to talk about it. The then president got furious about such slander and just wanted to expel the journalist from the country. The Brazilian institutions did their job and the Banana Republic’s little dictator’s rapture, just like the ethyl alcohol that emanated from his pores, evaporated.
Last week a well-known YouTube blogger was summoned by the police for having called the Palácio do Planalto’s tenant genocidal. Again, the institutions did their job and the justice suspended the investigation. In the tragedy Romeo and Juliet written by William Shakespeare more than 400 years ago, in the famous balcony scene where Juliet sighs her love for Romeo and is sad to know that his family name (Montecchio) is hated by her family (Capuleto). “What’s in a name? Wouldn’t what we call a rose smell the same if called by any other name?” she murmurs. Pick whatever name you want; the rose will keep giving off the same perfume.
You all have a nice weekend.
Arnaldo Luiz Corrêa
