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Sugar

CURSED INHERITANCE
07/12/2018

Receives weekly comments from the market







2019 is already around the corner and should bring a breath of renewed hope to cheer up the country and, above all, the sugar-alcohol sector. After thirteen long and gloomy years of PT (Workers’ Party) government, especially during the tragic period when Dilma Roussef was calling the shots in Brasilia and treating the sugar-alcohol industry with intense contempt, it is reassuring to watch the definitive removal, through the ballot boxes, of this gang which destroyed the country.

Dilma and her creator were largely responsible not only for the dire straits which many mills are in, but also for the disappearance of so many other production facilities, be it due to an artificially valued real which encouraged some mills to take out wrong loans in dollars in the middle of last decade, be it due to the maintenance of a damaging policy of fuel price control, be it even due to the imposition of the change in the executive board of institutions linked to the sector with which she (Dilma) didn’t accept as interlocutor, blocking the dialogue and the ideas.

PT (Workers’ Party) government caused so much harm to the sector that the prisoner’s as well as his pet puppet’s names should be removed from the historical records. Lula encouraged the sugarcane expansion promising to turn Brazil into the Saudi Arabia of ethanol; however, when the pre-salt was discovered off Brazil’s coast, he blew the sector off because he knew that expropriating Petrobras would be a much easier task.

A large part of the expansion was disorderly and decided more on the emotion of the moment than reasoning explained by the calculations of the Excel spreadsheets. In 2007-2008 oil was experimenting new highs on the foreign market and the sector didn’t add a single cent of real to its revenue. Lula’s honeymoon with the automotive sector included the elimination of and the reduction in tax, which made the sales of popular automobiles, through long-term financing, skyrocket, and the gas price freeze as well. Easy credit and cheap gas were just two of the several tricks used by the ex-president during his disastrous term in office.

Deceived by Lula’s merchant’ talk, the sector expanded the sugarcane production, saw ethanol consumption represent almost 49% of the Otto cycle, but it was hindered from benefiting from the high prices abroad because gas price was frozen here. During Dilma’s term, however, the participation of ethanol shrank while the sector ran up debts. Dilma’s six-year-long term brought losses of at least R$69.3 billion to the sector, out of which R$48.3 billion in revenue loss and R$21 billion in debt increase.

Bolsonaro’s government can change this history, especially if he keeps his “more Brazil and less Brasilia” promise, that is, if he lets the productive sector produce, facilitating investments, providing the contracts with legal security and diminishing the interference of bureaucrats and regulatory agencies which create difficulties in implementing new industrial units.

The sector has a great opportunity ahead. The economic upturn will imply in consumption increase of two items which have been dammed: fuel (because gas price went way up due to the combination of booming oil price, declining real and declining consumer’s income) and food and drinks (lower income). Gas price at the gas stations should drop reflecting the recent free fall on the global markets, and dammed consumption can be restored.       

The world hasn’t been paying attention yet to the scenario which has been taking shape in Brazil – stagnant sugarcane production, without the prospect of new local or foreign investments, a pretty reasonable possibility of increase in fuel and food consumption in Brazil in line with the expected GDP increase by up to 2.5% next year and a surprising recovery of the number of licensed light vehicles. We should close out this year with almost 2.5 million units and some are already projecting 3 million units for 2019.

The thing is that we won’t have enough sugarcane production to meet this demand. To get an idea of the size of the problem, even by using conservative parameter of fuel consumption for the next six years (to coincide with a sugarcane cycle), assuming that there is no change in the gas C mix, there is a deficit of about 10 billion liters per year over the next six years. This is as if tomorrow we needed 110 million tons of sugarcane available from 2019 on already. Since this miracle is not possible, this intricate equation will be solved like every good whose availability is smaller than the supply – prices will go up.

But and what about the world surplus? Well, you are all aware of the financial problems the European producers have been facing. There will be reduction in beet sugar production in that continent. Other countries, such as Thailand, also have difficulties producing at the current price levels. Brazil is the only one which can produce sugar at volume and prices close to the current market. India is a different case. The huge subsidy that the Indians consume is equal to our social welfare program Bolsa Família, except that there the recipient at least produces something. There are 50 million people who depend on the sugarcane distributed to almost 6 million sugarcane producers. There will always be some mechanism to disguise this income transfer, that is, complaints in the WTO (World Trade Organization) might have no effect at all.

However, it can never be said enough that whether the scenario for sugar is constructive or not, the symbiotic relationship this commodity has with the oil price traded on the foreign market converted into real is very big and it won’t break out of it, especially because we believe the next government will give market forces great importance and it will keep the current fuel pricing policy. Next year will demand extraordinary attention towards risk management.

The XXXI Intensive Course on Futures, Options and Derivatives in Agricultural Commodities 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). The number of spots are limited.  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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Receives weekly comments from the market