The sugar price drop in NY this Friday followed suit with the low performance of all of the soft commodities. The futures contract for July/2019 closed at 11.54 cents per pound, the lowest price since October/2018. Coffee, orange juice, cotton, and cocoa all dropped up to 5%. A last week’s comment reader quickly sent me a text via WhatsApp asking if I feared going sold short at 12 cents per pound, alluding to the question I made on that comment.
Apart from the commodities’ performance, the sugar week in NY had interesting discussions about what will happen to the market from now on. As always happen, there are those who are more pessimistic, others who are more optimistic, and some who don’t understand what is going on. Datagro Seminar had relevant panel discussions addressing the perspectives in Asian countries, the sugar supply and demand for 2019/2020, the next RenovaBio steps and the insights of the potential foreign investors in the sector in Brazil, among others.
The consensus among the best thinking heads of the market clearly points to two factors which are undeniably found in whatever price trajectory the market will have to take: oil barrel value on the foreign market and the real rate against the dollar. This is what we have observed here for many months. Sugar in NY will follow the product of the two.
The recent devaluation of the real against the dollar, influenced not only by the macro scenario but also by the inadequacy of Bolsonaro’s government to do what was expected from it, that is, to govern, has discouraged the investors and increased the distrust as to the approval of the social security reform, vitally important for the fiscal balance. The chances that the approval will come through in the first semester are slim. We believe it might happen only in November, which will undoubtedly be a cold shower and the Brazilian currency will surely stay even more volatile until then.
Under this scenario, any increase in the real will pressure the sugar rates on NY futures market on the part of those who still have open lots for fixing their commercial contracts with the trading companies. In our opinion, this issue will be an important limiting factor in the medium term for the growth of the rates in cents per pound since most mills think about sugar in real per ton. On the other hand, a NY broker told me he didn’t get any fixation order from the Brazilian mills.
The second effect of the exchange devaluation as long as the oil keeps at the current levels and doesn’t sink under 60 dollars per barrel (Brent) will be on gas price pass-through in Brazil by Petrobras which, by the way, is still low by 6-8% compared with the foreign market. So, this strongly decreases the possibility of ethanol mix reducing because it will still be trading above sugar in NY, comparatively. Today, we already hear on the market that the mix will be 2/3 of ethanol.
The bottom line is a weak real at first limits a sugar hike because there are pending fixations on the part of the Center-South mills, reacting later if oil stays unchanged because it favors the arbitrage of ethanol against sugar.
Although most active participants of the market recognize that sugar is extremely pressured, suffering from the macro reflexes which affect soft commodities, helped by the funds which are heavily short, a significant share of the traders also believe that the fundamentals point to a recovery. The thing is, when will it come along? An experienced NY broker told me that the market may be on the floor, but every floor has a hole. And sugar seems to be in it right now.
The 32nd Intensive Course on Futures, Options and Derivatives – Agricultural Commodities will take place on August 27 (Tuesday), 28 (Wednesday) and 29 (Thursday), 2019 in São Paulo, SP at the Hotel Wall Street near Paulista. Don’t leave it to the last minute. Over 1,000 professionals have already attended it and they consider it to be the best course on agricultural derivatives in Brazil.
A nice weekend and a safe return to those who were in the Big Apple.
Arnaldo Luiz Corrêa
