The futures sugar market in NY closed the week at an amazing high motivated by the reviewing of the fundamentals associated with the commodity. The rains that have been falling on the producing regions have lit up a yellow light alerting that the start of the 2016/2017 harvest crushing might be delayed and that the sugar production in the Center-South might not be the one the market has been working with.
Before producers get excited about the recent bullish trajectory of the prices, it is essential they look at two important points which must be present so the physical market can meet the expectations reflected on the futures market. The first point is the behavior of May/July and July/October spreads – the stronger the spreads are, the more it means that the trading companies worry about an eventual short of sugar availability for April and May, and buy spreads to try and make a profit, or bring their hedges from months with longer maturities to shorter maturities and profit from that. The second point is that we should watch the behavior of the premiums/discounts on the physical (sugar for delivery in April/May/June). Their improvement shows that the end buyer is worried about the delay in the harvest and pays more so as not to run the risk of a shortage. If these two components move in that direction, the tendency of the futures market is to optimize that.
The funds have gone long again. It seems to me that when the market reached 12-13 cents per pound, someone must have sharpened the pencils and figured out that the potential for each one from that level up was infinitely smaller if compared to the potential for a high.
The appreciations of the real and the oil over the week end up having a neutral impact on gas pricing. Because the average fuel price at the pump, based on 100 countries, is at US$0.95 a liter, the balance price of the hydrous at the pump using this parameter would be R$2.3265 a liter, which is below the going price. It is clear that this can pressure the mills to prioritize sugar production.
For the sugar FOB market, the appreciation of the real, however, can make the mills hold back on selling new commercial contracts. Based on Friday’s closing, May, which closed at 14.83 cents per pound with the dollar at 3.7610, represents a R$1,279-per-ton sugar fixation for that date, that is, just about the same price as the previous week with the dollar at R$3.990 and with NY almost 100 points cheaper. That is, can we expect a negative correlation coming back if the real continues to appreciate against the American currency? If it returns to 3.5000 NY can reach 16 cents per pound?
As for the estimate for the 2016/2017 harvest, Archer’s estimate is 618.5 million tons in the Center-South, divided between 34.3 million tons of sugar and 27.5 billion liters of ethanol. This amount of sugarcane is almost 3% larger than last harvest’s crushed amount. However, when we talk about ATR (total recoverable sugars), this will be the smallest production of ATR in four years: 83 million tons against 84 million last harvest, 86.7 million tons in 2014/2015 and 87.4 million tons in 2013/2014.
For a producing country who will need to increase sugarcane production by 100 million tons over the next five years, this is a worrying number and makes it clear that the sugar market will be extremely volatile and subject to extreme price changes over the next years due to an evident imbalance between world production and consumption, which has been increasing by 1.8% to 2.2%, respectively, mainly when Brazil see no meaningful increase on its sugarcane fields.
It was a glorious day today for Brazil to watch former president Lula being coercively taken in for questioning by the Federal Police. This soap opera is far from being over, but the “D” day for this criminal organization (using the words of one of the Supreme Court members) disguised as a political party to leave the scene and for its responsible members to be put behind bars is just around the corner.
Registrations for the XXV Intensive Course on Futures, Options and Derivatives in Agricultural Commodities are open. The course will be on March 29, 30 and 31 from 9 am to 5 pm in Sao Paulo. Send in a message to priscilla@archerconsulting.com.br for further information.
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Have a nice weekend everybody.
Arnaldo Luiz Corrêa
