The foreign energy market has been suffering huge selling pressure for the last ten days. The gasoline futures contracts (RBOB) and oil (WTI and Brent) have been leading the greatest falls among the commodities in the last thirty days – a true post-Halloween bloodbath, which strongly splashed onto the sugar-alcohol sector.
An experienced NY-based analyst on the energy market has admitted that the drop in WTI oil caught her off guard because she thought the foreign market would hold on to the 63/64-dollar-per-pound-per barrel levels. However, the market melted even further aiming for the 60-dollar-per barrel level. The fact is that the United States is now the greatest oil producer with 11.6 million barrels per day and there is a lot of oil left over around the world.
Oil in decline is bad for the sugar-alcohol sector because it brings the gas parity closer to the hydrous ethanol on the domestic market diminishing the competitiveness of the renewable fuel at the pump. The combination of this event with the devalued real against the dollar is worse than oil in decline because Petrobras realization price, that is, the value that the state-owned company charges the refineries for the gas sale to the dealers is smaller in real and makes gas cheaper at the pump. These are the inherent risks of commodities: the combination of supply and demand associated with logistics, exchange rate and other issues which make the market swing and the risk managers go nuts.
The most professional mills got rid of these hardships a long time ago. With a great deal of creativity they structured operations which combined the purchase of oil put financed with the sale of sugar call. With the oil market in decline, they gain with the appreciation of the put and they can choose whether to use the profit to add on value to the ethanol produced or to incorporate the gain from sugar sale into the current prices.
On sophisticated markets, like the commodities today, there is the need to use the creativity structuring operations which adequately minimize the risk. In order to do that, the company senior management needs to do its best to understand all the extension of the risk involved and safely and responsibly choose the best tool to be used. There is no future for those who don’t use the futures markets.
The sugar futures contract in NY maturing in March/2019 closed Friday at 12.78 cents per pound, representing a 64-point fall this week, a fall close to 14 dollars per ton.
Not everything is a bed of thorns, though. Although the recent high in NY cheered up the producers, some weeks ago we said that the market lacks consolidation, that is, the validation of the sugar market fundamentals which are close to the timeline haven’t matured yet. For example, it is a fact that next year the sugarcane harvest in the Center-South won’t be too far from this harvest’s volume. There hasn’t been significant expansion or new investments. We will practically crush a greater amount of sugarcane (because the rains have been helping), but we will certainly have a smaller yield because this harvest that is closing has been extraordinary. In short, we will produce the same amount of sucrose as that of the last ten years.
We’re constructive in terms of target price for NY because there is a repressed consumption on the foreign market of both fuel and foods and drinks. The first one because gas price has gone up too much and there has been a migration to ethanol, which is positive and whose way back – if there is one – will be slow, because the consumer “liked” to pay way less for fuel. Of course there is the monetary illusion on the part of the consumer that he buys more liters of ethanol if compared to gas. Actually, he has been driving around less because the Otto cycle shows a 3.5% shrinking in the consumption compared to last year, a fall which had only been seen in January/2004. The second one is that the perception of an improvement of the economic picture with Bolsonaro’s election opens the door which had been locked due to the fear of unemployment and less economic activity.
What makes us constructive is that there is not enough sugarcane to meet the potential demand which might emerge with a possible economic growth, which will foster the consumption of foods and drinks; with the eminent fall of gas price, whose fair prices today, looking at the international parity, should be close to R$4.000 per liter, which should make the consumption of fuel grow even further when we see that the licensing of new light vehicles in Brazil should close next year close to 2.4 million units. It is an exercise of patience.
The fixation estimate of the mills, based on September 30, 2018, points to 4.157 million tons of sugar of the 2019/2020 harvest had already been fixed up until that date. If we assume that Brazil will export 21 million tons of sugar for the 2019/2020 harvest, although there are controversies about this number since there are already estimates pointing to 18 million tons of sugar, then 19.79% of the harvest would already be fixed. This percentage is slightly above the 18.65% average of the last seven years (when Archer Consulting started following up on this). The average value of fixations is at 12.94 cents per pound without polarization premium, equivalent to 50.48 cents per pound. The average value of fixation of the 2019/2020 harvest up until September was R$1,159.54 per ton FOB Santos equivalent, in this case with the polarization premium included.
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
