The futures sugar market in NY closed the week at another high, taking another step toward the expected consolidation. The contract maturing in March/2019 closed Friday (holiday in Brazil) at 13.12 cents per pound, up 49 points against the previous Friday. The other maturing months had an average 46-point high in the months corresponding to the 2019/2020 Center-South crop and a 30-point high in the months corresponding to the following one. The huge discount on the current price against the futures curve, pointed out to our clients a few weeks ago, showed that something was out of plumb and the curves should converge. What we had predicted ended up occurring.
We believed that the sugar prices in NY could beat 13.50 cents per pound in the last quarter of the year – around December. It turns out that the response took place before we thought it would, and, surprisingly enough, the funds continue pretty short at 88,000 lots according to last Tuesday’s COT. Where the futures market can arrive at if the funds settle their long positions is the one-million-dollar question. Keeping in mind, dear reader, that as we have said here, some funds have short positions in coffee and sugar combined with long positions in oil. Oil has dropped by 4% and the two soft commodities have gone up by 6%.
The result of the first round of the presidential election in Brazil gives candidate Jair Bolsonaro, from the Liberal Social Party (PSL), ample advantage. Only a disaster or an unexpected fact will pull Bolsonaro from the position of next president of the Federative Republic of Brazil and keep him from taking office on January 1, 2019. Brazil has strongly swung to the right, resulting in a 52% renewal of the House of Representatives and 56% of the Senate, in a firm response of the voters weary of the politicians out there and a stop to the corruption institutionalized by the Workers’ Party (PT), which was not able to elect influential figures such as former president Dilma Rousset and the Rio de Janeiro Senator, Lindbergh Farias.
This brief introduction is to show that the possible election of Bolsonaro has pressured the exchange rate and the real, which was worth 4.2000 a month ago, is now at 3.7500, an 11% appreciation. The real appreciation fits in with the macro scenario of the oil drop which can eventually change the approach of the mills when it comes to next year’s mix.
More optimistic people on the financial market believe, for example, that the real can get to 3.4000 in the first quarter of 2019. In a simple calculation, looking at the gas price on the foreign market about a month ago in real against today’s price, we have a 14% drop in real. This can eventually – if the oil and the dollar keep falling against the real – diminish the parity between ethanol and sugar. We must keep our eyes open.
The accumulated position until October 1, released by UNICA, shows a sugarcane production of almost 458 million tons, 2.3% less compared to the same period last year, with a mix of 36.37% of sugar and 63.63% of ethanol, resulting in an accumulated production of 22,273 million tons of sugar (a 24% drop against last year) and 24,386 billion liters (a 25.05% increase against the previous year) up to now.
The competitiveness of hydrous against gas on the domestic market made sales of the product grow overwhelmingly against last year. According to ANP, with accumulated data from September 2017 to August 2018, hydrous consumption in the period was 17,034 billion liters, almost 33% above the same period of the previous twelve months. The consumption of fuel by Otto cycle in August was 4.462 billion liters, 8.4% above the consumption of the previous month, but still 3.24% below last year. Higher gas prices added to the economic crisis cooled consumption.
Registrations for the XXXI Intensive Course on Futures, Options and Derivatives in Agricultural Commodities, which will take place on March 19 (Tuesday), March 20 (Wednesday) and March 21 (Thursday), 2019 at the Hotel Paulista Wall Street, in Bela Vista, in São Paulo (SP), are open. For further information, send an email to priscilla@archerconsulting.com.br. We recommend that the participant read the book Derivativos Agrícolas, which can be found at iTunes, Amazon, Livraria Cultura or www.estantevirtual.com.br, before attending the course.
Have a nice weekend.
Arnaldo Luiz Corrêa
