Unless you have Dory’s memory, that blue clownfish on Disney film “Finding Nemo”, known for her recent memory loss problem, which makes her a very dear and funny character in the story, you will remember that what pushed the market up last year was the speculative funds, though the fundamentals do not point to that stratospheric level. Well, those who remember our comments back then know well what our view on that bullish fantasy was.
Now, the funds, probably with the pockets full after making a lot of money out of cocoa, orange sugar and coffee, can play a little with sugar, right? Brazil’s sugar exports over the last twelve months have shown there does not seem to be a problem with the product availability, so the funds are well founded. Brazil flooded the sugar world and there is product left and, consequently, prices must reflect that.
To reinforce this position, the crushing in progress in the Center-South does not seem to cause any concern. With an accumulated record crushing of 281 million tons of sugarcane until the first two weeks of July, it’s just natural that the funds – maybe ignoring the finiteness of sugarcane – project on a basic rule of three that we will come to 625 million tons by the end of the crop. And, if that were possible, the sugar production could come to 43 million tons. That’s another factor corroborating with their bearish vision.
However, there are points that might be being ignored. A part of this pressure on sugar quotations in NY stemmed from the strong devaluation the Brazilian real suffered against the American currency. Based on our projections, sugar price for the 2025/2026 crop is outdated by 150 points due to this devaluation and the NDF (Non-Deliverable Forward) contracts, which encourage the mills to fix their sugar.
Back to the Center-South – the market consensus is that of a crop around 605 million tons of sugarcane. However, the dry weather in the countryside is alarming. Whoever drives through the roads that cross some areas in the state of São Paulo comes across a dry sugarcane field. Based on the average of the last six crops, the accumulated of the first two weeks of July ended up representing about 44% of all the crushed sugarcane in the respective year. That is, in theory, we still have 56% of the crop to be picked. If we consider a drop (very optimistic) of just 10% of the sugarcane field still to be crushed, we would come to the 605 million tons of sugarcane most people have been working with.
We will have to wait to see how the weather will behave until mid-September to evaluate the scale of this loss due to the water deficit. If the sugarcane field suffers a 15% drop (possible), the final crushing will come to 586 million tons of sugar. And that’s what the fund cannot see.
We could also discuss the fact that it will be hard for India to be back to the export market before March next year. Besides, the internal prices both in Uttar Pradesh and Maharashtra are above the NY price.
The exchange rate appreciated, and the dollar closed out the week at R$5.5089 with an accumulated appreciation of 2.78% and this can be a factor of price stability for sugar, bringing greater support to NY. A possible reduction in the interest rates by the FED is something positive for the commodities.
The sugar futures market closed out the week almost unchanged with the contract maturing in October/2024 at 18.54 cents per pound, just 6 points high compared to the previous week. The sugar values converted into Brazilian real per ton retracted by almost R$70 per ton.
Back to the funds, we believe (we have already said that before) that their position is vulnerable and can bring discomfort resulting in a coverage of short position the way the funds are used to doing – with that usual panic. You’d better watch out.
Our collaborator Marcelo Moreira comments that “October/2024, after trading at the year’s low at 17.64 cents per pound (with the help of the Brazilian real devaluation, which was trading at 5.88 R$/US$ on Monday), closed out the week at 18.48 cents per pound. The important support is still the floor of the Bollinger band of the 50 days at 17.68 cents per pound, with resistances at 19.09 and 19.54 cents per pound. July/2025 closed out at 17.66 cents per pound and finds support at 17.21 cents per pound, with resistances at 18.27 and 18.74 cents per pound. Breaking the 17.21 cents per pound, it will make room to go for 15.90 cents per pound”.
It’s almost unbelievable that companies – regardless of size – neglect risk management and all the compliance procedures that are part of it. This week the press announced that a multinational fertilizer company lost US$220 billion in the second quarter with contracts of foreign exchange derivatives made with financial institutions in Brazil by a person unauthorized to make these operations. Stories like this abound in the corporate world every day. They are structured operations that seem to be specially designed to disorganize the company, frauds in collusion with internal agents who subtract millions of dollars from the company safes, derivatives that are supposedly allocated to let the company breathe the financial moment better, but act like boots tightening the oxygen tube. One of the flaws seen at companies – that is not a privilege of Brazil - is the lack of adequate professional training and qualification to look at these operations critically and to see beyond “zero cost”.
You all have a good weekend.
Arnaldo Luiz Corrêa
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