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Sugar

HOLD ON TO YOUR CHAIR. THE SECOND SEMESTER IS GOING TO BE TENSE.
29/06/2024

This year’s second semester promises even more volatility for sugar given the number of relevant elements that can impact the market. The week saw the expiration of the futures contract of July/2024, which closed out at 20.33 cents per pound, an accumulated weekly increase of 136 points, or 30 dollars per ton. October/2024 closed out at 20.31 cents per pound, with a 115-point fluctuation over the week (25.25 dollars per ton).

Following the trading session, the NY exchange announced a delivery of more than 1 million tons of sugar, apparently all coming from the Center-South. The old discussion that starts with the statement saying that a strong market doesn’t deliver physical product resurged. I wonder if the physical market has been left on its own.

The combination of a stronger sugar futures market with a sharp devaluation of the Brazilian real against the dollar came close to R$5.6005 thanks not only to the macroeconomic scenario but also to the unwise remarks President Lula said. In an unoriginal populism that doesn’t contribute at all to pacify the financial market, Lula just brings more insecurity to the market when he suggests, for example, “the interference in Central Bank”. That’s what PT (Workers’ Party) is about and it will never change. Nobody was expecting anything else. If Lula keeps having this belligerent attitude, things will end badly for him. As Roberto Campos, one of the brightest minds of this country and the grandfather of the current president of the Central Bank, would say, “PT is a party of workers who don’t work, students who don’t study and intellectuals who don’t think.” And we thought we would bury this association in 2018.

At least the blabbermouth at the Presidential Palace in Brasília has opened up the opportunity for export sugar pricing for the mills, not only for what still needs to be fixed but also for the next volume. The average price for the sugar futures contracts in NY converted by the generous NDF (Non-Deliverable Forward), a contract in terms of currency with financial settlement, provided by the financial institutions, reflected an improvement on sugar final price of R$215 per ton over the week for the contracts of the 2024/2025 (October and March) crop, and R$157 and R$113 per ton, respectively, for the two next crops.

It’s time to take advantage of this exaggerated boom of the dollar and act rationally when rationality seems to be lacking in the market. Assume that at some point within the next 90 days out the dollar will stop going up, reflecting the huge entry of foreign currency via balance of payment (it’s estimated at more than US$70 billion), say, R$5.2500. If the American currency exchange returns to this more palatable level, the fixation the mills can get today for shipping in 90 days contemplating the interest rate curve would only be possible at these levels (in real per ton) if NY went up 300 points. That is, we cannot afford to stand idly by.

In order to feed the bulls, it is a fact that more and more analysts have been revising their sugarcane production estimates downward and the market is starting to price the risk of a long drought in the Center-South, especially in the Ribeirão Preto region. The risk of frost is also under the radar and there is also the concern over the possibility of below-average rainfall in Thailand and India.

As a counterpoint, the number released by UNICA was once again above what was expected, and the market in NY felt the blow and dropped right after it was released, though it bounced back by the time the trading session closed. The report says that the total sugarcane crushing in the Center-South up until the first fifteen days of June reached 189.5 million tons, 13.25% above the same period last year and a record for the period, surpassing the 2020/2021 crop when it reached 187.3 million tons.

Sugar production also broke a record. 10.95 million tons against 9.57 the previous year and above the 2020/2021 crop with 10.6 million tons of sugar. The accumulated in the first two weeks of June over the last ten crops has represented a percentage of the total crushed volume in the year between 24.1% and 31.9%, putting the average at 28%. If we extrapolate it to this year, we will arrive at a total production of 676 million tons. No way. But it just proves that we started out faster, but we will certainly end much sooner. Our number is still at 605 million tons of sugarcane.

With a mix of news and a tangle of narratives, bullish factors that can support price increases are: a) the decrease of estimates for sugarcane production in the Center-South; b) the perception that the market has started pricing in a risk premium due to the continuous drought in Brazil and possible adverse weather conditions in other producing regions, like Thailand and India; c) the funds have reduced their short positions and now are short by less than 30,000 lots, which points to a more optimistic price perspective.

On the other hand, what can push prices down include a) the continuous depreciation of the Brazilian currency against the dollar; b) an accumulated sale volume within the 19.50-20.50 range and c) the geopolitical uncertainties that can bring instability to the market. Not to mention how the impact of Trump’s potential election might impact the market and energy. Hold on to your chair because the second semester is coming up.

The soft commodities can’t complain because they lead the list of best-performing assets in the semester. Cocoa has gone up by 173%; orange juice, 32%; coffee, 24% and sugar, 2%.

Technically, our analyst and collaborator Marcelo Moreira points out that October/2024 closed out the month at 20.30 cents per pound, appreciating 11.66% over the month. News coming out of India (problems with sugarcane quality/yield) has been making operators review the balance of world supply and demand giving prices a new support. October/2024 closed out the week at 20.30 cents per pound and now shows supports at 19.50/19.12/18.04 cents per pound and resistances at 20.36/20.67/22.15 and 23.00 cents per pound.

Do you want to get the book “Commodities Sem Fronteiras”? You can get it at Livraria Martins Fontes in São Paulo or through the link below. Enjoy your reading.

https://oseulivreiro.com.br/produto/commodities-sem-fronteiras/

You all have a great weekend.

Arnaldo Corrêa

Receives weekly comments from the market







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