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EXTREMELY HEAVY MARKET, BUT WHO CARES?
13/04/2018

The sugar market is still under unfavorable news attack about price recovery. Comments about a continuously increasing Indian harvest also followed by the large Thai harvest reinforce the idea that the world is loaded with sugar and the ground is the limit for prices.

March/2018 at the NY Exchange closed the week at 12.10 cents per pound – a 24-point (5.30 dollars per ton) negative variation against last week’s closing. The October/2018-March/2019 spread ended Friday at 118 points, representing a carry equivalent to 24.3% per year, inviting the attentive industrial consumers to sharpen their pencils to take advantage of the huge distortion. Statistics do not lie.

When analyzing the data on the last 10 years daily closings of the most-traded sugar contract in NY, covering the period of April/2008 until March/2018, we see that in only 7.5% of the cases, NY closed the session below 12 cents per pound. Only in 2.3% of the times did it close below 11 cents per pound. A market below 10 cents per pound was seen in just 0.3% of the occasions.

Just so the reader can compare these values to their equivalent on the other side of the distribution curve, we can assert that in only 7.5% of the times the market closed above 27.48 cents per pound, in 2.3% of the times NY closed above 30.79 cents per pound and in 0.3% of the occasions the market ended the session above 33.94 cents per pound. In other words, the chance that the market will stay below 12 cents per pound is the same it had to trade and stay above 27.48 cents per pound! Translating it into English, fixing sales at 12 cents per pound has a gigantic chance of turning into a terrible deal (we already said that last week)

Now, take a look at how the price is out of sync: the closing of the sugar contract expiring in May/2018 in NY this Friday, 12.10 cents per pound combined with the closing of the exchange rate at R$3.4120 correspond to a value of 41.29 cents per pound. This value, compared to the closings of the last ten years, adjusted by the IGPM (General Index of Market Prices) is the lowest in 99.74% of the times.

Two news reports can contribute to having a more negative impact on the sugar market: the first one is the growth review of the Brazilian economy for 2018; before there was talk it would be at 3.5%, but now some economists have lowered this prediction to 2.8%. The reason is mainly the worsening of the political picture, with feelings running high after the arrest of the criminal and former president Lula. The uncertainties about the presidential succession and if Brazil will elect someone committed to the necessary reforms in social security, politics, and tax make investors push back on their investments. The second one is about the consumption of Otto cycle fuel. In the 12-month accumulated, the consumption growth was a meager 0.52%. The explanation may be related to the fuel price for the consumer, who starts using his own vehicle less often or restricts its use.  

Hydrous ethanol plummets at the start of the harvest, as we knew it would happen. The mills, especially those with serious cash flow restrictions, need to make money and they pressure prices. However, we believe that hydrous has a very strong price support – around 65% of the gas price. Today, the consumer looks at fuel prices at the gas station and sees gas price with the number 4 in front (R$4.09) and ethanol price with a 2 (R$2.89) and he does not even pay much attention, many times ignoring that the parity is worse than 70%, as is now, but he has the feeling that with R$50 he can put much more fuel in his car tank. It is illusory but psychological active. This is the feeling that makes us believe that the hydrous limit is 65% of the parity.

Working for the recovery of prices are the friction between the United States and Russia, which can drive up oil price on the foreign market and improve the arbitrage of hydrous, increasing even more the mix of ethanol in the Center-South, and also, but not less important, the fact that president Trump has signaled with possible changes in the biofuel laws in the United States, which can increase the demand for ethanol in that country by 26 billion liters. This is an answer to the retaliation of China and will surely make the corn producers happy.

Booming oil and pressured real place our estimate of price realization of Petrobras at R$1.8700 per liter (8% above the price of R$1.7115 per liter that the company published on Friday). Using the price realization of the Brazilian state-owned company, we can predict that the minimum price that hydrous would reach the pump is R$ 2.5700, equivalent to tax-free R$1.5163 per liter at the mill. On Friday, this price was about R$1.4900 per liter. That is, we are on the ground. But, even so, this price is equivalent to sugar at 14 cents per pound, more than 150 points above that of NY. If Petrobras adjusts its price realization according to what we have estimated to be the fair value, the hydrous price at the mill should be r$1.6300 per liver, equivalent to NY at 15.08 cents per pound.

Registrations for the 30th Intensive Course on Futures, Options , nd Derivatives – Agricultural Commodities are 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.

It is important to see that up until late March, 9.6 million contracts had been traded at the sugar exchange in NY. If this breakneck pace of traded contracts keeps up, by the end of the year we will get to almost 38 million traded contracts (only futures) breaking the previous record of 2015 when 34.5 million contracts were traded at the exchange. To have an idea of the weight of this volume that was traded over the first three months of the year, in 2004 the total of contracts was 9.7 million.

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Have a nice weekend.

Arnaldo Luiz Corrêa

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