The sugar futures market in NY closed out Friday with July/2021 at 16.72 cents per pound, a 24-point drop against last week (about 5.20 dollars per ton). Since the real devalued against the dollar over the week, the closing converted into real showed a recovery of R$10 per ton for the 2021/2022 crop average, R$15 for the 2022/2023 crop and R$23 for the 2023/2024 crop.
The three first NY maturities show a futures market on a slight carry, rebutting the narrative of a possible shortage of sugar in the very short term. Even so, if it happens, the carry reflected on the futures quotations can suggest that the amount of sugar in the pipeline is more than enough to counter a possible specific imbalance of supply.
Last week we spoke about the market vulnerability. The non-indexed funds, according to the numbers released by the CFTC (Commodity Futures Trading Commission), reduced the long position by 25,599 contracts and the market dropped 89 points.
Last week, when the funds increased their long positions, the market moved one point up every 172 traded lots (purchased) by the funds. Now, this week, when they settled their purchases, the market dropped 1 point every 288 sold lots. It seems to us that the market is taking in the drop better – since it absorbs more lots to vary just one point. I wonder if it can be consumer’s fixation.
Brazil exported 1.9 million tons of sugar in April driving the 12-month accumulated (May/2020-April/2021) up to 32.5 million tons, a volume 68.7% higher than that of the same period last year. Broadly speaking, the foreign market saw a flood of 13.3 million tons of Brazilian sugar over a year. Analyzing the 24-month period in order to cancel out possible peaks and valleys, the exports reached 51.8% million tons (covering May/2019-April/2021), still 12% below the greatest volume over the 24-month period reached in October/2017, which was 58.7 million tons. If we export the estimated 25 million tons of sugar in this crop, we will break the record over the 24-month period. This shows that Brazil is recovering its market share on the foreign market. And the world will need Brazil. Why do we say that?
If we compare the global 2020/2021 consumption with the average of the three previous years, we see a tiny growth of 0.2% that has caused concern all through the sugar chain for the next years. However, we notice that the consumption curve is changing slopes. There are four main reasons for this relieving shift: a) countries whose per capita sugar consumption pattern has been upward, reflecting an income recovery; b) countries known for being great consumers whose population is also increasing; c) countries whose potential is real, but it comes up against the per capita income for the consumption of industrialized food and drinks; d) countries that can migrate – albeit slowly – from the consumption of corn syrup to sugar, as occurred to the USA recently.
Conservatively, the combination of these factors point to an increase in world sugar consumption of about 1.0% per year for the next 6 years, chasing away the discouraging view we had about the consumption in the recent past. Our estimate shows that the world consumption will go from the current 173.8 million tons over to 184.4 million tons in the 2026/2027 crop. Interestingly enough, ¾ of this consumption increase of almost 11 million tons will come from 5 countries.
India is one of the responsible countries for this increase. The Indian population should grow by 1% per year over the next six years, going from the current 1.35 million people to 1.43 billion (overtaking China) and the per capita consumption will go – according to our study – from the current 21.2 kg per capita per year to 22 kg. So, the country will start consuming 31.5 million tons of sugar in 2026/2027, three million more than what they do today.
Well, this additional consumption strengthens the domestic Indian market, especially when we recognize that part of the sugarcane over the next years will be destined for the production of ethanol whose main goals is to decrease pollution in the major metropolises and reduce the heavy account of oil import of India, third greatest consumer of energy of the planet. The country will have smaller sugar availability for export (unless the sugarcane crop area grows) making the foreign market shorter and more balanced.
For these reasons, we are more constructive on sugar price in cents per pound over the next years. And we are bearish on sugar for this crop in real per ton. The real is too devalued against the dollar, greatly due to the total inactivity of the federal government in every aspect of the economy and the foreign investors’ fear of the instability caused by the ongoing political crisis and the skepticism as to the course the country will take.
Fixing prices in real per ton continues to be the correct strategy for what has been left of sugar to be fixed in this crop and, for the next crops, it’s recommended that pricing be accompanied with the simultaneous purchase of a call at an exercise price 200/250 above the level of fixation in NY.
You all have a nice weekend.
Arnaldo Luiz Corrêa
