The sugar market in NY closed the week at a strong high with funds buying again, though at a shy volume close to 25,000 contracts. March 2016, which expires next Monday, closed Friday’s session quoted at 13.93 cents per pound, a 141-point positive variation against last week. A lot of mills have breathed with relief for having had a second chance at fixing good prices for what is left from 2015/2016 and a little from 2016/2017. They can’t miss this chance!Look, May 2017, which closed Friday at 14.54 cents per pound, together with the hedge an NDF strategy, can represent a R$1,450-per-ton fixation. That’s a great compensation.
After that sugar market meltdown that astonished us last week, this week started off with a strong price recovery. The market went up to almost 140 points on a single day. The last time that has occurred was in August 19, 2011, when the market closed at 30.96 cents per pound. Percentage-wise, Tuesday’s high (whose trading volume went beyond 300,000 lots) only matches up to that of January 23, 1986, when the market closed at 6.07 cents per pound, a 12.6% increase against the day before, which had closed at 5.39 cents per pound.
All kinds of weird explanations have come up for this price boom – the funds had gone short in March 2016 and messed up and had to cover themselves rapidly, or there was a default on white sugar delivery in London, or forecast for heavy rains for the beginning of the crushing period, or whatever else. It’s just human-like to want to explain everything that happens, even when the real reason cannot be found.
We have argued that the sugar fundamentals are strong, but the world stocks, the global economy lethargy, the oil price at very low levels and the loss of credibility of the Brazilian economy reflecting a weakened real have greatly compensated for the strength of the fundamentals. We believe there is a damming of money going on due to the exogenous variables which affect and distort sugar pricing.
Over the last twelve months, hydrous consumption has grown 37.15% while that of anhydrous and gas A has dropped 9.16% and 1.77%, respectively. Fuel consumption in gas equivalent has gone up only 0.25%, a disaster compared to the growth that took place the year before, which reached 7.8%. We have raised an extremely conservative data collection to try to look ahead and undestand what might happen to the Brazilian sugarcane production over the next 5 years.
The forecast has been based on the current picture, that is, for example, a stagnant consumption of fuel (gas equivalent) which will grow vegetatively only. The sale of light vehicles, for example, fell 25% in 2015 and we have kept the same number of sold vehicles for the next years. We have also assumed that Brazil will export below its capacity making room for other countries (Europe and Thailand) and will get to 2020/2021 exporting only 25.5 million tons of sugar. We have estimated hydrous consumption growth and have kept that of gas and anhydrous constant.
In five years, the world will be demanding an additional amount of sugar close to 19 million tons. Brazil, in the 2020/2021 harvest, keeping today’s premises, will need 100 million tons of sugarcane. Even if we believed that would be possible, the base industry, which supplied the sugar-alcohol sector and was the world leader in the production of complete plants of mills, has gone poor and bankrupt. Who is going to build more mills? Who is going to invest in the sector?
A question for you to think about over the weekend – if the mills weren’t well-fixed for 2015/2016, would the market go up at this 140-point voluptuousness and more than 300,000 traded lots?
Can the market go up any further? We will be looking at March delivery which will take place this Monday. It is still early to say but the amount of sugar production in the Center-South some people on the market have been working with (36 million tons) is not feasible. Mills should prioritize ethanol production at the start of the harvest for financial and cash flow reasons.
The fear on the market is the stress that the real can suffer from the appalling political situation Brazil is in. Some believe the dollar can reach R$5.0000. What would happen to sugar in this case? Well, if we take a R$1,250-per-ton-FOB ceiling for the sugar, that means – with the dollar at R$5.0000- NY trading at 10.90 cents per pound. However, the dollar at R$5.0000 would put gas at R$4.4600 at the pump and hydrous at R$3.1235 which would mean sugar at 13.00 cents per pound. In other words, it looks like the floor price in NY is about 12 cents per pound. The risk of a low for those buying at 12.50 cents per pound is extremely small, whereas for those selling at this level, it is very high. Maybe this might have gone into the equation of those who think about the market.
The biggest creep in the history of our Republic is in for it, and soon we will see him behind bars.
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You all have a great weekend.
Arnaldo Luiz Corrêa
