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REALITY AND PERCEPTION
15/06/2018

The commodities are taking a beating on the month-to-date. This Friday oil dropped and sugar was affected by its downward movement because cheaper oil means cheaper gas and, therefore, ethanol loses value and the gain it has against sugar drops and affects the production mix. Things don’t always happen in this sequence in real life, but many times perception is more important than reality for the market. In our opinion sugar has overreacted – we will keep monitoring it. 

Grains are on a downward trend, with soybean, soymeal, and corn dropping by 11%, 10%, and 8%, respectively – this month alone. Oil, sugar, and gas plummeted 6-7% and coffee 5%. As a trader told me this week at an event, “you set up the fund at the right time”. Let’s make a toast to irony.

NY closed Friday slightly over 12 cents per pound, representing a drop against last week. Sugar is extremely susceptible to rumors coming from the financial market. A weaker real speeds up the fixation of still pending commercial contracts for the 2018/2019 crop and pressures NY since a lot of mills fix in real.

It is reasonable to ponder that the huge Indian and Thai crops are already duly reflected on the price traded in NY. The funds settled a great part of their short positions (they still have 25,000 only) and, therefore, it seems to us that the futures market should have less selling pressure from now on.

Among the factors that could negatively affect sugar prices in NY is the real devaluation against the dollar which is influenced by the foreign scenario and the complete uncertainty over the presidential election in Brazil. If Petrobras pricing policy is kept, the devaluation of the Brazilian currency affects the gas import price and balances out the arbitrage of ethanol with sugar, with no mix change risk – unless, of course, oil stays at the current price range. Real and oil are, therefore, the two main components which can pressure the current sugar prices in NY.

However, we see more factors on the horizon that can push prices up. The drought in the sugarcane regions of the Center-South will be reflected on July and August’s crushing and those people who are closer to the agricultural areas of the mills are not optimistic at all about the perspectives. Although the average crushing estimates in the Center-South are around 584 million tons of sugarcane (Archer Consulting’s number is 563), the perception now is that this number should go to about 550 million tons of sugarcane. If this happens, the impact on prices will be violent despite next year’s world production. Again, many times perception is more important than reality for the market. And a substantial decrease in sugarcane in the Center-South will be frightening.

As for ethanol, the domestic consumption volume of Otto cycle fuels is disappointing. There is not enough money in the consumers’ pocket. However, this factor makes them go for ethanol when filling up the tank because they can buy more liters for the same amount of money. That is why despite the small total consumption numbers, the hydrous positively surprises us and should have its prices traded at higher levels than today’s prices for the last quarter of 2018. But even now we are still uncertain over who will be the next president elect and the effect this will have on the exchange rate.

Tarcilo Rodrigues, BioAgencia executive, for example, believes that hydrous average price in the last quarter of the year should be R$2.4000 per liter, tax included. If the exchange rate is at R$3.7000, this is equivalent to sugar at 16 cents per pound in NY. The dollar at R$3.4000 or R$4.000 (for those who believe that left-wing lunatics will be elected), the equivalent in NY would be 17 and 14.40 cents per pound, respectively. That is, regardless of who is elected, the ethanol/sugar parity value would be well over today’s level (March/2019 closed at 13.06 cents per pound).

Of course, the analysis is simplistic. So many other factors can and will certainly influence the trajectory of sugar prices – oil, American interest rates, the real and the perspective of the Brazilian economy, as exogenous factors, and the sugarcane harvest in the Center-South for 2019/2020 (which can be below 540) and as India and Thailand will develop next year.

Having said all that, we remain positive for sugar in cents per pound in the last quarter of this year, but we believe that opportunities of pricing for the 2019/2020 harvest within the range of 1,200-1,250 real per FOB ton should not be missed.

Solutions to freight transport in Brazil, according to Marcos Jank: a) artificially controlling diesel and gas price, as occurred between 2006 and 2004, is not a solution. Brazil needs a transparent fuel pricing policy which keeps the correlation with the world market; b) fixing freight prices is not a solution to leverage carriers because it makes the situation of the rest of the economy worse and by extension their income; c) over the last 50 years, we haven’t had a State agenda for transport infrastructure and logistics. Brazil depends on road transport a lot, run on fossil fuel. We have no available broad alternatives for a continental country (railways, waterways, pipelines) that can add to or substitute for the road structure.

The 30th Intensive Course on Futures, Options and Derivatives – Agricultural Commodities will be held on August 7, 8 and 9 in São Paulo-SP at the Hotel Wall Street on Rua Itapeva.

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.

Arnaldo Luiz Corrêa

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