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IS THERE A LIGHT IN THE DISTANCE?
04/05/2018

The futures sugar market in NY closed unchanged in the first three maturities (July and October/2018 and March/2019) against the previous week, closing at a slight high in the three subsequent months and at a low in the longer maturities (from May/2020 on). July/2018 closed Friday at 11.51 cents per pound.

This fall in the maturities related to the harvests further ahead can be explained because many companies stay tuned for the devaluation of the real against the dollar and are taking advantage of the favorable curve of the Brazilian currency for the longer maturities and are making some hedge and that way decreasing the risks of the price below the cost. 

The October/18 and March/19 spread is still high encouraging the capitalized mills to push the sales hedge of October/18 to March/19 and that way fully using its storage capacity. There is a rumor that trading companies are offering the mills “opportunities” to carry their stocks up until the end of the year, dividing potential profit in the operation. 

The expiration of May futures contract in the exchange of NY had several large trading companies delivering to several large trading companies. The interpretations might vary according to their slant. There are more bearish people now because they argue that a large receiver of the previous maturity redelivered now because he didn’t find a better buyer. The bulls say that a large producer associated with a large trading company received sugar, which might suggest that it will produce more ethanol than what he expected and then he will need sugar and blah, blah, blah. Forget it; nothing has changed – it was just another delivery.

Even though it is too early to claim that the fact is that a lot of mills start to effectively work with a crushing number much smaller than what was said at the beginning of the year, which was 585 million tons of sugarcane on average. Today, this number already points to less than 580 million tons of sugarcane with a blatant downward slant. But there are people who believe we will produce only 569 million tons of sugarcane and 29 million tons of sugar.

To me two points still look a little out of line with the feeling that emerges from the market: one is the estimate of average ATR (total recoverable sugar) of 134.78 (according to the recent survey made by NovaCana) and the mix of sugar (41.47%). Few executives believe in a high ATR (total recoverable sugar) this year because of the extraordinary performance of the sugarcane field last year, which is very difficult to be repeated in a year when the cultural tracts were smaller and the sugarcane field is older (in fact, the age average of the sugarcane field is the highest in twenty years, according to an NY broker, a Milk Way researcher in his free time). About the mix, we believe it will be closer to 40% than to 41.47%.

The production of total average ATR determined among the consulting firms and companies in the sector is 78.5 million tons (NovaCana). The Archer Consulting number is 77.3 million tons or 1.55% smaller. When the scenario starts getting clearer as far as the actual number of crushing, ATR and mix goes, then we will see a recovery. But there is no counting on it now.

The good news this week is the increase in light vehicle sales, showing the still-sluggish recovery of the car sector, but pretty far from the levels reached in the PT (Workers’ Party) governments which subsidized the car industry at the expense of the taxpayer (since they increased the Petrobras’ loss via cheap gas) and slaughtering the sugar-alcohol industry (which was obliged to sell cheap ethanol below the cost).

Is there more good news? Over the last eighteen years, in 83.3% of the occasions, the arithmetic average of prices of the closing of the first contract traded in NY during June was higher than the average price seen in the previous month. And the price went up by 10% on average. October against September has the same performance (83.3%), but the prices go up by only 6%.

The bad news is the concern of the foreign investors over the presidential election in Brazil and its effects on the real. A great bank closely associated with the agribusiness believes that a potential stress can push the dollar to 4 real, pressuring the sugar quotations in NY (imagine that R$1,100 per ton would amount to 11.97 cents per pound, an excellent price if compared to the settlement today of 932 real per ton). The other bad news is that president Temer with an eye to the reelection (more unlikely than men going to Mars by bicycle), can reduce gas and electric energy price with the stroke of a pen, in a populist move worthy of the idiots who came before him. There is just so much patience for so much populism.

Next week, most decision-makers of the sector will be together in New York to celebrate another edition of the Sugar Dinner in that city. It is time to clean away the mold, scare away the moth from the tuxedos and prepare to hear all kinds of bearish and bullish arguments about the trajectory the market should take. Such events end up changing the mood of the participants very little, but the situation of the market is so despairingly bearish, exacerbated by news every minute showing more and more sugar in every corner of the world, that there might appear a light in the distance – a meteor, maybe?

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A nice trip and good business deals to all those who are going to NY.

Arnaldo Luiz Corrêa

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