This is the first comment of the year after the Holidays recess and vacation, which are always necessary to recharge one’s batteries.
We have said here over and over again that the sugar price trajectory on the world market relied – and it still does – on the behavior of oil prices. People strongly believed in the sugar price recovery mostly due to the fundamentalist picture that is coming up. That is, the size of the next sugarcane crop in the Center-South, whose preliminary numbers point to a worrisome range of 570-575 million tons; the expected increase in fuel domestic consumption dammed for so long due to the high gas prices last year, which significantly affected the consumer; and the improvement on the consumption of processed foods and beverages which, all together, should throw the door open on the sugarcane deficit which has not been reflected on the NY prices yet.
The thing is that oil price has plummeted. After reaching more than 75 dollars per barrel in early October, the market watched in amazement the price melt to 42 dollars per barrel over the last week of December. With the oil drop on the world market and the strengthening of the real right after Bolsonaro’s election, the arbitrage between ethanol and gas seen (though not immediately reflected on the market prices) raise questions as to the production mix to be chosen by the mills for the 2019/2020 crop.
The fact that the world macro scenario is unfavorable to the risk assets (i.e. commodities) and that the mills, in the hope of better prices last quarter, which never came along, were made to fix contracts at low prices in order to meet the commitments previously formalized also contributed to the sugar price stagnation in NY.
The domestic fuel market has to deal with a huge doubt about the size of ethanol carryover stock. There are people who think there will be ethanol left over and, therefore, prices will be pretty pressured, and there are people who believe that the consumption recovery can be surprising and stabilize prices. The red light is for the mills strapped for cash flow which will have to make money soon and can roll out product at any price.
The worst scenario would be, as already pointed out here in several occasions, an even sharper oil fall on the world market because it would cause some huge pressure on gas value at the pump (today’s fair value for the consumer in the state of São Paulo is R$3.7800 per liter) negatively influencing sugar price in NY due to the greater availability of the product through the reduction of the pro-ethanol mix. As you can see, the equation is still complex.
However, the market as a whole believes that the worst for the product is already over, that is, the market below 10 cents per pound is considered a mirage under all circumstances.
Based on these assumptions, unless oil brings incomprehensible surprises, the sugar fundamentals will consolidate in this very first quarter of the year, mainly if the amount of crushing stays at the levels mentioned in the second paragraph.
We believe that the sugar contract in NY maturing in July can reach up 14.50-15.00 cents per pound. If the government can pass the social security reform and the flow of world capital is positive with its effect on the Brazilian currency; this range can be 50-75 points worse because a stronger real means cheaper gas.
The XXXI Intensive Course on Futures, Options and Derivatives in Agricultural Commodities will be held 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 is 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.
Archer Consulting has moved its office to Santos. The address is Avenida Pedro Lessa, 1920, room 45. Our telephone numbers are +55-13-3307-5064 and +55-13-3307-5065.
Arnaldo Luiz Corrêa
