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LOTS OF VARIABLES OF AN INTRICATE EQUATION
23/03/2018

The numbers released by UNICA related to the start of the crushing of the 2018/2019 harvest of the Center-South still do not mean a lot. However, in conversations with several mills, the consensus shows we are heading fast toward a sugar mix much closer to 40% compared to the average predictions that prowl the market and that were around 43%.

The fact that the sugar prices on the futures market in NY are extremely pressured (May closed the week at 12.61 cents per pound, a slight 4-point fall against the previous Friday) feed into the concern of the mills that saw the key to producing ethanol without batting an eyelid.

Despite the bad mood of the market, we have reason to believe that this should be a year of great volatility and of bumps that are typical of a rollercoaster. There are several variables on the table, all of them are important and lots of them are totally uncertain. Putting together a strategic plan that shows us the way is a tough task.

First, start out with the amount of sugarcane to be crushed in the Center-South. The estimates were around 585 million tons on average, but now they have started showing a slight low trend with numbers that can get up to 570 million tons easily. Second, there is the mix definition. If the market was working with 43% of sugar before, now it is headed toward 40%. Third, the oil price on the world market is approaching 70 dollars per barrel (Brent) again and we notice that Petrobras is holding back the total transfer of this increase to the consumer. This will not last. 

Fourth, all the India, Thailand and Center-South predictions take for granted that there will be no climate change. But things are not like that in the real world. Fifth, the political unrest in Brazil that will increase in an election year, even more so now with the freak show put on by the STF (Federal Supreme Court), will raise the level of the real against that of the dollar. Sixth, the huge short position of the funds, with 169,000 lots, has its balance price not too far from that of the market (13.62 cents per pound, according to our calculation) making it pretty vulnerable if any spark caused by frictions might occur in the market fundamentals.

Seventh, the demand growth for new vehicles should grow this year in Brazil putting more 2.2million units in the streets. Last but not least, the GDP growth (between 3.5 and 3.8%) will foster the consumption of foodstuffs and industrialized products being able to heat up the internal sugar market, pulling it from the bottom of the well where it is and pitting the export sugar against not only the hydrous but also the domestic market.

An interesting point obtained after analysis of the numbers collected by the Department of Agriculture of the United States about the world stocks – over the last 20 years, the greatest increase in the building of world sugar stocks happened between October/2012 and September/2013, when the stocks jumped from 35.19 million tons of sugar to 42.29 million tons of sugar, that is, a 7.1-million-ton increase. Over this period, sugar traded at 867 real per ton on average, which adjusted to current values represent 1,176 real per ton or – if we take the lowest price of the period – R$1,054 per ton. If we use the real quotation average of February, R$3.2500, the lowest price seen in 2012/2013 (world harvest) converted into NY would come to 14.12 cents per pound.

The market volatility is still too low. With the bumps we should feel over the next months due to so many variables which make up this intricate sugar equation, it is worth looking at the structures for the second half of this year searching for situations called black swan, that is, those improbable ones. A market trader sadly said that sugar “is so bad, but so bad, that it does not need a black swan to get better, it needs a black elephant”.

The Federal Supreme Court did justice to its reputation. The highest court of the country is walling in the most stinking mud of the history of the republic along with the equally poor legislative and executive powers. Brazil is known as a wonderful land of outlaws. Here the petty thief and the pickpocket go to jail immediately while a criminal such as the former president Lula, whose attorneys are the most expensive ones in the country, campaigns for the presidential elections of 2018. There must be no country on the whole planet where impunity is worshipped so shamelessly. Crime pays here and the shame of being Brazilian keeps increasing more and more.

Registration for the XXX Intensive Course on Futures, Options and Derivatives – Agricultural Commodities is open. The course will be held on August 7, 8 and 9 in São Paulo-SP at the Hotel Wall Street on Rua Itapeva. If you plan on taking it, remember that spots are limited and in the last events they ran out 40 days before the course started.

If you want to get our weekly comments on sugar straight through your email, just sign up on our site by logging onto http://archerconsulting.com.br/cadastro/.

You all have a nice weekend.

 

Arnaldo Luiz Corrêa

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