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THE WORLD IS CRUEL
30/11/2018

November closes revealing a painful devaluation of the commodities in the energy segment. WTI oil plummeted 22.5%, Brent melted 21%, gas crashed 20.5% and heating oil collapsed 19%. In the case of gas, the fall will affect Petrobras import price and, therefore, worsen the arbitrage of ethanol with sugar, casting doubt on the production mix for next year. At the other end of the chain, as greater monthly increase, is natural gas, which has gone up almost 40% and has led a fund, whose manager dared stay short at a huge number of out of the money calls, to a meltdown in Tampa, Florida this month.

Sugar closed the week with March/2019 quoted at the NY Exchange at 12.83 cents per pound. Once again it tried to break the 13 cents per pound; it did, but it returned to the negative territory right away. As we have said here, again and again, the sugar market still needs consolidation coming from a clearer picture about next year’s production. There are several factors that can support prices, but these factors depend on the trajectory of the Brazilian economy, the real movement against the dollar, and how oil will behave – each playing its specific important part.

It’s reasonable to admit that the sugar price on the foreign market is predisposed to appreciate in next year’s first quarter when some of these abovementioned factors turn more crystal clear. And the much-announced finding that the world surplus will be much smaller than that estimated and that Thailand and Europe will equally have a smaller production can be added to these factors.

We have long said here that it will be interesting to observe how the world market will behave with Brazil pulling out a huge export volume. Archer Consulting estimated a 21-million-ton sugar export for 2018/2019, but this number tends to be much smaller. Some analysts put it at just 18 million tons of sugar. We believe that it can be 19.2 million tons of sugar.

A point that is worth reflecting on this specific issue is that this decade the smallest Brazilian sugar export, taking into account a moving period of twelve months, has been 21.9 million tons (from October/2011 to September/2012), and the smallest export over a moving period of 24 months has been 47.5 million tons (from February/2014 to January/2016).

Should the current scenario remain, that is, without a sugarcane field expansion and the greatest part of sugarcane going towards ethanol production, we can see the 24-month accumulated in March/2019 come to below 47.5 million tons of sugar, and a year later, that is, in the March/2020 melt to 40 million tons of sugar. Who will provide the world market with this accumulated downsizing? There will be impacts.

That’s why we are constructive (unlike being unconditionally bearish) in terms of price for next year. The world macro scenario, according to some economists, reduces the possibility of the Brazilian real strengthening against the dollar beyond the 3.5000 floor. So, there is a real possibility that next year sugar will come close to R$1,300 per ton with room to go beyond that (I bet on R$1,400 – pure hunch). Of course, all this depends on the relationship that most affects our market: oil and real.

Next Wednesday, December 5, I will be in Ribeirão Preto at the 17th Grupo Idea Seminar at the Convention Center speaking about “Perspectives of the Sugar Market in 2019”. If you happen to be out there, I will be more than pleased to have a chat with you. See you then.

As a nephew of mine who also works in the commodities market says, “The world is cruel”. As soon as the market learned that the fund manager James Cordier had wiped out hundreds of millions of dollars from his fund, selling uncovered options, several Internet ads for law offices offering services for those investors to sue the mentioned manager and try to get the lost money back started popping up. Meanwhile, on Amazon, the book “The Complete Guide to Option Selling” by the same guru is selling for US$3.99. The world is really cruel.

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 (Agricultural Derivatives), 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

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