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The futures sugar market in NY had a very bad week, closing Friday with the contract for October/2018 at 11.54 cents per pound, a 69-point drop (more than fifteen dollars per ton) against the previous week. The agricultural commodities, especially coffee, soy oil, and sugar, are suffering from the currency devaluation and the uncertainties that surround the national political scenario.

A number of points have contributed to the price deterioration of sugar over the week: a substantial drop in traded hydrous prices lit the yellow light for those who saw the biofuel values practically get to the level of the sugar in NY, comparatively to 250-300 points of premium over equivalent sugar in NY. It is estimated that 400 million liters of ethanol were not consumed during the truckers’ strike, increasing the stock of the product and pressuring the already tight cash flow of the mills. As is known, pressing need for cash flow and excess of available product are indigestible ingredients that usually hurt the markets.

Added to the issues faced this week is the fact that Petrobras has not been passing the gas price traded on the foreign market on to the consumer. And the Brazilian state-owned company, which sells gas below the market replacement price and, by extension, strangles the mills via smaller ethanol profitability, will carry the can for this populist measure.

The average gas price traded at the pump collected among more than 100 countries last week pointed to 1.18 dollar per liter, equivalent to R$4.6028 per liter in Brazil considering that here we have a mix of 27% of anhydrous. Since the average gas price in the largest consuming center of the country was 4.2750 real per liter, the discrepancy using this criterion is 7.2%.

By another criterion, which is taking the oil price on the foreign market and estimating the landed cost by Petrobras, we have come to the equivalent value of R$4.7053 per liter at the pump, a discrepancy of 9.2%.

The apparent abandonment on the part of the Petrobras board of the hitherto successful model of fuel pricing denotes a huge irresponsibility of the federal government towards the sugar-alcohol sector and towards the future and expansion of biofuel in Brazil. Once again the bill will be paid by the sugar-alcohol sector which has already financed cheap fuel to foster the car industry during PT’s (Workers’ Party) governments, seen its participation been reduced at the energy matrix from 54.5% in 2009 to the current 40% and, with so much judicial instability and anachronistic interventions, is going through the ninth consecutive year producing the same amount of ATR and runs the risk of seeing the RenovaBia project go down the drain. Sixteen years of the most incompetent public administration of the Republican history commanded by PT/PMDB (Workers’ Party/Brazilian Democratic Movement Party) has turned the sector into what we see nowadays.

The situation only gets worse with the financial situation decay of some mills which not being able to refinance the debts expiring right away, feel pressed to sell their products (mainly ethanol) at any price to meet unavoidable short-term commitments. This type of stress distorts the analysis.

If we were betting on sugar price recovery on the foreign market for this year’s last quarter, it is evident that with so many upheavals and exogenous factors that maximize the problems, the price ceiling seems to be lower.

What drives prices up, in our view, is the clearer perception of the effective crushing size of the Center-South starting now in July/August when the drought that hit the sugarcane field will be more strongly felt during these crushing months (the drier sugarcane, according to some technicians, has not been crushed yet). The numbers might surprise negatively (below 550).

The volume of Brazilian export accumulated over the period of January-May, 2018 reached 7.88 million tons of sugar, a number 18.7% smaller than that over same period last year. There were less two million tons of sugar in five months in comparison to the previous period. Chances are that still in 2019/2020 Brazil will keep sugar export limited to 23 million tons. Can the downsizing or the disappearance of Brazilian sugar over the next two years which begin now reduce an availability of more than 8 million tons of sugar on the world market?  Will this sugar be replaced hassle-free by Thailand and India? This is a tricky question.

Can the funds come in long? This does not seem to be the case yet. However, where does there seem to be more potential for gain – in the purchasing or in the selling? We will find out soon.

The trade war between the United States and China is a poker game. Everybody is picking up a card. The flop opened and someone has a pair of two but acts like he has a pair of Aces. And nobody seems to want to fold. Iran says it will bring oil to 100 dollars per barrel.

What holds back an eventual price recovery is the return of administered prices for fuels, the sluggishness of the physical sugar market and the situation of shortage on the part of the mills which can put a negative spin on prices due to pricing based on the need of cash flow. These are difficult times.

A trader said that the only thing that falls down more than sugar is Neymar in the World Cup.

Congratulations to the Belgium team on the final-quarters. It has been my favorite team since the start of the Cup, but it will be tough. Brazil has proven that too much superstar complex, theatrics, fancy hairstyles, and tattoos do not necessarily turn into good performance in the field.

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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