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IF THE GOVERNMENT DID NOT GET IN THE WAY SO MUCH
29/06/2018

The futures sugar market in NY watched the expiration of the contract of July this Friday with a physical delivery of 350 thousand tons of the product to be fully received by a trading company linked to a Brazilian producer. On the bright side, the small delivery takes away the stress that was hovering over the physical market about the excessive availability of the product and it can draw a line, maybe as of now, on the price ceiling. “So, is the delivery bullish?” some will ask. I don’t believe it is bullish but slightly constructive. October/2018, which now becomes the first traded contract, closed the week at 12.25 cents per pound, a 16-point drop, almost 4 dollars per ton. The reaction of the market and of the funds might contribute to the price rebound and – as it always occurs – they might overreact. We will keep an eye on that.

We could even imagine that from now on the market could show some more strength. But we are in Brazil and the ghost of gas price control by the federal government still hovers over the market. Petrobras shares traded at the Stock Exchange reflect this fear on the part of the investors and the promise of some left-wing candidates, such as Ciro Gomes (God forbid!), who wants the gas price at R$2.80 per liter, shows the total irresponsibility that the political class and many of the presidential candidates have for the taxpayers’ money. If Brazil does not get rid of these populist plagues in this year’s election, it will sink and bring all the sugar-alcohol sector and RenovaBio along with it. The sector has got to lash out.

The sector’s vulnerability intensifies due to planning difficulty because of the increasing economic instability, political uncertainty, and legal uncertainty. This last one gives us the creeps. As the brilliant journalist J.R. Guzzo said in the blog of Veja magazine this week, “this Federal Supreme Court gang say that all its sentences are according to the laws – they, and only they, are the ones who decide what the law means. If they decide that two plus two is seven, no Brazilian will have the right to say it is four”. They are the ones, who have never gotten a single vote in their lives, who are pushing Brazil into the hole.

As we have already said here before, an investor who wants to put money into the sector under this scenario full of improbability and packed with clouds filled with cheap populism is bold, to say the least. The Senate passed a legislation which allows the mills to sell ethanol directly on the retail market. A true shot in the foot disguised as liberalism. The direct sale increases the possibility of tax evasion, sheds doubts on the quality of the product delivered to the customer and, if any these problems arise, it is the image of the sector (which is already treated with little respect by great part of the press) which will be hit in its nerve center. 

Is there any good news? Well, the funds have decreased the short position by scanty 4.500 lots. As this number corresponds to Tuesday, might they have reverted positions and now they are long? Another positive point at the end of the tunnel is the Brent oil price which is at 78 dollars per barrel. Petrobras continues practicing domestic prices below that of the foreign market by about 4% (on average for the last 30 days). This might be due to the company policy to maintain the market share. Even excluding the seasonality of gas, we estimate that on the average of the sugar and oil quotations for the next twelve months, assuming the ethanol parity at 65%, the biofuel is equivalent to 220 points above the sugar over the period.

The first semester closed with sugar absolutely leading the drop of commodities: 19.53%; soy (oil and grain) dropped 12% and 10%, respectively; coffee melted 9%; oil went up 23% and gas 20%. Orange juice and wheat went up 18% and 17%, respectively.

The crushing estimates in the Center-South point to a volume below 540 million tons of sugarcane. We believe that if this number consolidates, keeping the current levels of oil price on the foreign market, the sugar mix around 40% and the reduction of the position of the funds, we might see the market having a surprising performance. Over the last ten years, calculating the daily closing of sugar in NY, the highest average price for the last three months of the year has been higher than the price average for June 80% of the times.          

A stronger dollar against the real has increased the mills’ debt. By late May, according to our research and modeling, the mills owed the equivalent to 152 real per ton of crushed sugarcane, pushing the debt up to R$92.5 billion.

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. Two-thirds of the spots have already been filled and it is only 40 days away.

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Have a nice weekend.

Arnaldo Luiz Corrêa

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