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JOLTS AND BUMPS
10/08/2018

The sugar market in NY closed this week on a downward trend once again, with October/2018 trading at 10.54 cents per pound, keeping its downward trajectory fed by the renowned late fixations by the mills and helped by the real devaluation.

Although we have stated that there has been no correlation between the dollar and sugar fluctuation in NY since Petrobras started using the foreign market for fuel pricing, in a scenario where the sugar sales fixations for export by the mills are late, they will surely see stressful moments of the Brazilian currency as an opportunity to fix their sugar and reduce the financial trauma this slowness to fix prices has caused them. Any price increase is just an opportunity for the latecomers. That is why the market is not able to fight back.

The news coming from India has obviously “helped” bring the market down. India Sugar Mills Association (ISMA), which requested that the Indian government compulsorily export 20% of the sugar production, has contributed to the seven-dollar fall per ton in the week. This represents 7 million tons of sugar despite the abysm there is between the production cost and the market price. Would the Indian government have more than a billion dollars to finance this adventure? Other analysts believe India has to export two million tons of sugar together with some incentive so that the mill can stretch its surplus. It would be cheaper and more palatable on a market with scarce resources.

A totally unclear picture as to who the next president will be embeds an excessive dose of volatility on the dollar market in addition to scaring away the consumer who according to what an economist linked to the sector said acts like he is unemployed. He doesn’t consume, he doesn’t make plans and he doesn’t change cars because he is always concerned over how long his next paycheck will last. This might explain the timid fuel consumption in the Otto cycle. A recovery in consumption was already to be expected; however, the accumulated consumption over the last twelve months was 52.9 billion liters, a 1.18% negative fluctuation. As for the Brazilian political scenario, it is safe to get ready because jolts and bumps will occur until the fog dissipates or until we elect a pro-market candidate.

Early in the week the Associação Brasileira do Agronegócio – ABAG (Brazilian Agribusiness Association) presented its yearly congress discussing themes relevant to the Brazilian agribusiness. One of the discussion panels that I got interested in was about Funding Sources for the Agribusiness, where three directors of the main banks of the country, along with economist José Roberto Mendonça de Barros, spoke about the current financing models of the sector, with comments by journalist William Waack. It’s no news that Brazil greatly lacks financing lines of hedge which are indispensible for the health of not only the sector companies but also of the whole agribusiness chain, and even of the banks which finance it. The credit risk of the agribusiness could be mitigated, or even eliminated, if there were people willing to dedicate their time and intelligence to developing mechanisms which would help the companies to maximize the sales price of their commodities by using derivatives. Do you want a real example?

A mill gets financing from a financial institution abroad to meet the heavy costs of the start of the harvest. It manages to put things in order and when it trades sugar with the trading company for shipping along the year, the latter imposes restrictions on pricing in NY, allowing it just to happen as the mill delivers the sugar at the port, because it doesn’t want to run the credit risk with the mill. As a result, when it finally manages to fix its sugar, the mill has missed the chance for better prices and with lower revenue it puts the original financer at risk. Without money or credit, the trading company’s restrictions will only get worse and the time window for fixation made available for the mill will get even tighter. And everything turns into a huge snowball.

It’s unbelievable that with such sophistication on the financial and agricultural derivatives the banks are just not willing to create a product (insurance) which guarantees the producer a minimum compensation, contributing to his own financial health and that of the financial system itself. Even simple structures such as the purchasing obligation of a put to guarantee a minimum sale price or other more elaborated ones, including a call to decrease the acquisition cost of the insurance are easy to be implemented. The bankers’ short-term vision, maybe encouraged by easier profits in other presented structures which, not rarely, increase the risk, is almost an insult for a country with an agricultural vocation like Brazil. Is it just unwillingness or is it an absolute lack of derivatives education?

I got an email from one of my few readers who remembers the article “The commodities catch a bad flu, the sugar catches pneumonia”, which I wrote a year ago, and how bad the situation still is. He said he was perplexed and discouraged. And he remarks, “I honestly don’t see any perspectives, except try to see in your weekly articles something that feeds us hope like the grenade last week which I expect to go off”. The important thing is not to lose the good humor, ever.

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Have a nice weekend everybody.

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