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THE OTHER SIDE OF THE SURPLUS
18/05/2018

After a survey of some of the main sugarcane growing micro-regions of the Center-South, we found that the long period without rains or with insufficient rains has caused stress on the sugarcane field and starts worrying the sugarcane producers. The crop loss in some specific regions is alarming. Our analysis showed an average fall of 2.85% in the volume of sugarcane to be processed this year, although we warn you that this number is not conclusive yet.

Actually, we reduced our crushing projection of sugarcane of the 2018/2019 harvest to 563 million tons (previously 580), also altering the production mix to 39.9% of sugar (the previous number was 41.2%). With that, our sugar production estimate was reduced by two million tons to 28.5 million tons or a reduction of more than 7.5 million tons of sugar against the 2017/2018 harvest. We kept the ethanol production just about unchanged at 26.5 billion liters, an increase of a little over 400 million liters against the last harvest.

For a world market which is flooded with sugar, reducing the production by 2 million tons might not have much relevance. However, the projection of several mills is a lot worse than it is being disclosed. Our number of 563 million tons of sugar is considered ceiling, according to a climate expert of the Ribeirão Preto region, which reinforces our point warning that the biomass level recorded by satellites shows that the production can fall to 550 million tons of sugarcane. “The best sugarcane field is being harvested now at this start of the crop and the drought will hit the sugarcane which will be crushed in August and September much harder”, he says. The oldest sugarcane field tends to feel the stress caused by the drought the most and that increases the possibility of cana bisada (cane that was available but not processed in the year’s harvest) for next year.

At other times, this news would be enough to terrorize the market. However, we are jammed with sugar, right? The sugar price in NY doesn’t react due to some factors already discussed here before. Among them, the weakening of the real against the dollar (which this Friday reached 3.7607, the lowest value since March/2016), which has led the mills to stay tuned for opportunities of NDF (Non-Deliverable Forward) operations trying to optimize the pricing in real per ton. So, any rally in NY is immediately taken advantage of by the mills which still own open price fixing of commercial contracts carried from previous months.

If on one hand the weaker real limits any sugar price recovery in NY (because the mill thinks in terms of real per ton), on the other hand, by keeping the current oil price level on the foreign market, influenced by the same old geopolitical issues, hydrous turns even more appealing to the mills, the domestic market heats the crystal price (which will have to arbitrage with ethanol) and pushes the possibility of the Center-South supplying the foreign sugar market even farther. But, we are jammed with sugar, aren’t we?

The mills might be living the worst of hells, the outcome of an unhealthy equation which combines little product, low price and high cost (as they will crush less). However, the perspective for next year (2019/2020 harvest) points to an older sugarcane field, mills with no capital for cultural crop treatments or expansion. Preliminary numbers, according to our model, can repeat the number of this harvest and leave Brazil with an available production for export of 26 million tons of sugar.

The world market imports from Brazil 52.4 million tons of sugar every two years on average. The least we exported was 47.5 million tons and the most was 58.7 million. Up until April this year, the accumulated had been 55.6 million tons (May/2016 to April/2018). Due to the shortage of sugarcane destined for sugar this harvest, due to the reasons extensively discussed, and for the next harvest, if only the minimum is made available, that is, 47.5 million tons, Brazil can dry more than 8 million tons of sugar. How much is the world’s surplus anyway?

The fuel consumption by the Otto cycle over the last ten years has increased by 5.4% on average, and over the last five years by 2.65%. Let’s say that over the next years it increases by 4%. In two years we will have accumulated an increase in ethanol consumption (hydrous and anhydrous) of 2.4 billion liters. We can add to this volume the growth of the flex fleet, which deducting the scrapping rate of the vehicles, adds two million of new vehicles driving around in two years, that is, another 2.4 billion liters. Will there be enough sugarcane to meet this ethanol demand? It’s obvious that the answer will depend on the relative prices of ethanol and sugar.

Next year is also a huge question because it depends on the economic policy of a new government to be elected at the end of this year. If Brazil follows the world’s trend, we should elect a right-wing candidate, but if even the past is uncertain in this country, what can we say about the future? The thing is that depending on the polls if some mediocre candidate arises (and there are many) the real might suffer and delay a possible sugar recovery.

Since nobody has a crystal ball to guess at the combo between exchange rate and sugar in cents per pound, our estimate is that if there are no upsets in the political and economic areas, sugar should trade in the last quarter of 2018 above 1,200 real per equivalent FOB ton.

In almost twenty years we have seen a curious phenomenon. In 90% of the times, the monthly average prices of the daily closing of the sugar in NY have shown their yearly peaks in the first quarter or in the last quarter of the year. The only exception was in 2000 and 2008 due to the exchange rate devaluation and the world economic crisis. And, also interesting, when a peak of a certain year occurred in the first quarter, the next year it occurred in the last quarter. Last year, the highest average price occurred in January (20.54 cents per pound). Therefore, as usual, this year it should occur in the last quarter. It has been like this since 2000, except in 2009 and 2010 whose peak always occurred in the last quarter.

There are less than twelve years to go before Lula gets out of prison.

Registrations for the 30th Intensive Course on Futures, Options and 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.

The book “Derivativos Agrícolas”, written by journalist Carlos Raices and me, is already available on Amazon Books, iTunes, Google Play, Kobo and Livraria Cultura.

Just log on to the following link:

https://itunes.apple.com/br/book/derivados-agr%C3%ADcolas/id1294585521?mt=11. Good read!

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/

Have a nice weekend everybody.

Arnaldo Luiz Corrêa

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