The sugar market closed the week with October/2018 traded at 10.84 cents per pound, a 32-point drop against last week, still paying the indigestible bill of the damage India intends to do to the foreign sugar market dumping up to six million tons subsidized by the Indian government, for the despair of those – such as Brazil – that don’t live off these gifts. The Brazilian government should get tough on India through the World Trade Organization
The saying goes: “A fool and his money are soon parted”. Production leveraged by fanciful subsidies inhibits the production of those countries whose producers are not able to survive on the current price level of the foreign market. This distortion will blow out sometime. The Center-South might watch the start of this movement as early as next harvest.
You should have no doubt that there is still a long way to go before the start of the next sugarcane harvest in the Center-South, but it’s worth doing some exercises and drills to understand what lies ahead for us due to the lack of investments into the sugar-alcohol sector, lack of culture care in the old sugarcane fields and scarce expansion that forecast just about the same production of TRS (Total Recoverable Sugar), which has been at the same level for more than a dozen consecutive years, for 2019/2020.
The world sugar surplus is reduced every new forecast – most of the times made by analysts with great credibility – that gets to the market, confirming what everybody knows, that is, that monitoring the amount of sugarcane and sugar to be produced in India at a certain moment demands relentless futurology exercise and impeccable reading of the crystal ball. There are millions and millions of sugarcane suppliers.
With the already implicit reservation that we still have a long way ahead of us, a reasonable number of Center-South mills forecast a reduction in the sugarcane production for next year, which if combined with the aging of the sugarcane field with a more anemic TRS, lowers the Center-South estimate to unsettling 520 million tons of sugarcane, 7% below the estimate by Archer Consulting for this year and the smallest volume since the 2008/2009 harvest.
If this number is accurate, we must evaluate how much sugar Brazil would make available for the foreign market in 2019/2020. Regardless of the surplus created in India, the withdrawal of Brazilian sugar within a window of two harvests (24 months) is astounding. I will explain – observing the average volume of sugar exported by Brazil over a moving period of twenty four months (in order to smooth possible peaks and lows), we come to 52 million tons of sugar. It will be hard for Brazil to be able to export more than 22 million tons of sugar in 2019/2020 which, together with the estimate for this current harvest, adds up to 44 million tons of sugar within a 24-month window. In short, Brazil will pull eight million tons of sugar from the market balancing out the excess of sugar in the hands of Indians. Over this decade, within a 24-month window, the least the country has exported is 47.5 million tons of sugar. But and then?
Well, although Otto cycle fuel consumption has dropped 3% over the last twelve months against the same period last year, the number of light vehicles licensed up until August this year forecasts 2,574 million vehicles up until the end of 2018, a growth of almost 15% against 2017. Each vehicle consumes 1,200 liter of fuel per year on average. Our thesis is that with the election of a liberal president, the repressed consumption over the last months will recover, forecasting substantial increase not only in the licensing of vehicles for 2019 but also in the consumption expansion (sugar and fuel).
GDP growth, as we know it, is translated almost exponentially into industrialized food consumption on the part of lower-income families and fuel consumption on the part of middle-income families. A retracted industry such as the sugar-alcohol will not be able to meet the additional demand for sugar on the domestic market (whose price should increase and trade at foreign market premium) or the ethanol demand increase.
Oil market experts’ estimates are that the commodity is more prone to trading close to 100 dollars per barrel than going back to the 60-dollar levels. If they come true, oil price high can counterbalance the possible appreciation of the real (if Brazil elects a pro-market government) against the American currency, decreasing or even neutralizing the impact.
The non-indexed funds continue short (based on the position related to last Tuesday) 113,669 lots. Sugar and coffee lead the losses in the accumulated for the year – 22.8% and 22%, respectively; oil gains 18% over the same period. The funds continue in no hurry to settle their short sold positions in the soft commodities while profits increase. However, the scenario ahead for the sugar-alcohol sector for next year can make prices go for 13 cents per pound in this year’s last quarter, even just to get close to the ethanol arbitrage which today is trading at premium over sugar in NY. It will be interesting to watch this market and the response of the funds when the moment of truth arrives.
WE MADE A MISTAKE: In the last comment we said that the average debt of the mills was US$157.65 per ton of crushed sugarcane. Actually, it is R$157.65.
The journalism practiced in Brazil today is, with honorable exceptions, shameful. There is no discussion about ideas and proposals anymore, let alone investigative journalism, only newsrooms infested with leftists who applaud “geniuses” such as Haddad, Ciro or Marina. The oddest thing is they come down hard on the PSL candidate, Jair Bolsonaro because he – among other things – doesn’t know anything about economy. As if Lula and Dilma who led Brazil to the bottom where it is now today knew something about economy.
Lula must not have dedicated a single say of his term to doing something for Brazil. He only worked daily to steal and loot Petrobras and the country. He is a crook, criminal, scoundrel who should rot in prison if we were a tiny bit serious country. Dilma is a ridiculous figure. She cannot link words or ideas together. If she didn’t steal, she let it happen. She destroyed the sugar-alcohol sector, which provides millions of jobs in the field, through gas price freeze which in turn favored the car industry. Ethanol, renewable fuel, which participated with 55% of all the fuel used by the fleet of vehicles in the country, dropped to paltry 42% today. If we had kept the pace it was then, today the consumer would surely pay less to fill up the tank.
This gang that ruled Brazil for 13 years just spent money that they didn’t have, increased the public deficit and stole more than the dictator Suharto from Indonesia who compared to the PT gang is a pickpocket. Now, our press is desperate because for the first time Brazil “runs the risk” of swinging to the right and lots of them will lose prestige because here being leftist is classy. And they say Bolsonaro is a caveman, homophobic, chauvinist and guilty of the extinction of the dinosaurs. These people are a real joke. I would like to say that my candidate, as I have stated here, is João Amoedo, from Partido Novo (New Party).
Have a nice weekend.
Arnaldo Luiz Corrêa
