Sugar melted in NY this Friday after news from India about the government setting export quotas due to the sugar stock growth in that country. The export volume, according to the Indian government, would have to be 4 million tons in order to decrease the surplus stock which has already topped 10 million tons. And this news from India hit the long funds which must have “thrown up” their positions all through this fall-ridden week, increasing the melting seen today.
Although this mandatory export volume represents a little more than 8% of the total sugar traded on the foreign market, the impact on the market which lacks good news from its main exporter, Brazil, which holds the second lowest exchange rate in the history of its currency, could only have this tragic ending. So, October/2015 closed Friday trading at 10.96 cents per pound, a 70-point weekly fall, or 15 dollars per ton. The pressure was just about as strong on the months of the next crop year. Now, the October/2015-March/2016 spread narrowed to 74 points, with an implicit carry of 17% a year, which must have encouraged the partial reallocation of the hedges which were in March back to October.
The market is betting that the sugar delivery late this month against October/2015 in the futures exchange in NY will be close to a million tons. The receiver is the same Asian trading company which has monopolized the receiving over the last maturities.
We can’t downplay the fact that for the mills, Friday’s closing was almost R$1,000 per ton, the downward trajectory of the real will translate into stronger pressure on the maturity months for the 2016/2017 harvest, which offer the opportunity for those who know how to use the available hedge mechanisms on the market to set prices which are coming close to R$1,300 per FOB ton.
Hedge opportunities in real at current high levels might point to a more “sugary” harvest next year. And then ethanol availability, whose internal consumption has grown hugely, will worsen. Hydrous consumption from April to August this year in the Center-South grew 29% against the same period last year. The total consumption of ethanol over this period has grown 10% in relation to last year and has set a 10.3-billion-liter record for that period. Never will the arbitrage between the two products, sugar and ethanol, be as sensitive as expected for next year. It is difficult to expect that sugar to show such appealing cost and carry as we have seen this harvest, even because the world deficit will somehow be reflected and the narrowing of the spread should be the focus. For the mills, there is a chance the market spot premium will improve. For the consumer, such low prices seen recently might not occur in 2016/2017.
No matter where we look – be it at the internal fuel market which supports prices and intensifies the arbitrage with sugar; be it at the sugar market which should show world deficit; be it at the real devaluation which increases fuel import costs and favors ethanol – the fact is that the market pendulum is more prone to more constructive prices for the mills.
Being able to survive the nonsense of the economic policy headed by Dilma and her living dead legion is something the sector should be proud of. Unfortunately, this bad moment the Brazilian economy is going through, where CIDE would bring a huge relief to the sector, Minister Levy didn’t think it was the right time for it. And we continue to subsidize gas via lower prices than that on the foreign market. This week, gas average price on the foreign market was R$4.1552 per liter, which would create competitiveness for the hydrous at R$2.7000 per liter at the pump.
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Sugar Week starts this Friday in São Paulo and its highlight will be the Gala Dinner, which will be held on Wednesday, September 23, at Sala São Paulo, Estação Julio Prestes, in São Paulo. This is the 8th Sugar Week of one of the most important events of the sugar world, organized by the Sugar Club, chaired by Paulo Roberto Garcia. The 15th Datagro International Conference on Sugar and Alcohol, which brings together leaders of the sector and speakers from over 30 countries and is as important an event as the Sugar Week, will also take place. This year I have been kindly invited by Datagro President, Plinio Nastari, to join the panel on the world sugar market. See you there.
Nice week, nice trip to those who are coming to the event and good business everybody.
Arnaldo Luiz Corrêa
