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Sugar

TURNING POINT MOMENTS
10/08/2019

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The Center-South crop numbers released by UNICA show that the crushing accumulated up to August 1 is delayed by about 2.75% against the same period last year. Sugar production reached 13.3 million tons of sugar, almost a 10% smaller volume than that of the last crop, while ethanol reached a production of 15.5 billion liters, also 4% smaller than last year’s. ATR has been the worst, presenting a loss next to 6 kilos per ton against the 2018/2019 crop.

Brazilian exports – last data published in July/2019 – reached 1.82 million tons of sugar in the month, putting the twelve-month accumulated (from August 2018 to July 2019) at 19.173 million tons of sugar. This number is 23% lower than that of the same period last year and the smallest since December/2008. If we compare a period of Brazilian sugar export accumulating 24 months, from August/2017 to July/2919, we will come to 44 million tons of sugar, a volume 14% lower than the decade average, which was 51.3 million tons of sugar. We haven’t seen such a low volume since January/2010. This shows an alarming low on Brazilian sugar (9 million in a year!!!) available for the foreign market. Who cares, right? After all, India and Thailand have been able to fill in for Brazil – the point is how long for and how many hundreds of millions of dollars in subsidy.

It’s clear that given the current market condition, the mills will focus on ethanol production rather than sugar next year as well. More investments are being made in tanking and, with a decade-long stalled ATR production, and with a good perspective for the continued consumers’ preference to ethanol when filling up the tank, sugar should continue being second best. 

Aware of the problems, the trading companies struggle to move up the negotiations with the mills for the sugar export commercial contracts to next year for fear that the availability of the product is reduced. The volume of pricing by mills for the current crop, for example, stands out. Only 58.2% of the estimated export sugar is fixed, the lowest percentage since Archer Consulting started collecting these numbers eight years ago. This percentage is low because the base used was for exports of 19 million tons of sugar. This number, however, can go down since some mills have set aside an uncommitted volume of sugar to be produced for delivery in the last quarter of the year, which can eventually be converted into ethanol should its price continue to make sense.

Historically, the total sum of sugar export in the April/July period over the last 10 years has represented 31% of the final volume of the respective crop. With 6.2 million tons of sugar accumulated so far, in theory, we would close the crop year at 19.8 million tons, which would bring the accumulated of 24 months to 39.7 million, a substantial low on Brazilian sugar in two years which comes to 13 million tons of sugar.

Ethanol sales rate on the domestic market came to 2.5 billion liters in June, pushing the volume of the last twelve months up to 30.8 billion liters, an increase of almost 20%. Market experts believe that Brazil will close out the year with a carryover enough for just a 30-day long consumption. Prices might respond sharply.

Today, hydrous ethanol trades NY equivalent plus 190 points and FOB sugar is offered at a 30-point discount. That is, ethanol supplies the mill with a better return equivalent to 195 real per ton, almost R$10 per bag.

Meanwhile, the funds increase their short position during the week when the sugar market closed Friday at 11.90 cents per pound for October.

Up until July 30, according to the Archer Consulting survey, gas prices were lagged by about 16%, that is, Petrobras had room to increase the price at the refinery. It turns out that with the oil price meltdown on the foreign market after President Trump’s tweet, the difference has considerably narrowed and the Brazilian state-owned company is in no hurry to readjust prices right now.

The strategy many gas stations are using, especially in São Paulo and Minas Gerais, which contributes to the great increase in hydrous consumption, is worth noting.  They set the ethanol price at a ratio of around 0.65 against the gas price. This makes the consumer “visit” the gas station more times since, in order to drive the same mileage on ethanol, he will need to fill up more frequently. Visiting the gas station more times, the chance the consumer will use the convenience stores are 40% higher, bringing in more revenue to the gas station.

The consumption of fuel in the Otto cycle in the 12-month accumulated is still going through a 0.13% downturn against the same period last year. However, the GDP growth expected for next year should speed up fuel consumption and once more ethanol price will find huge support, though the parity with sugar narrows due to the upward NY price curve.

Staying bearish on sugar depends on a combination of factors: the sharp drop of oil price on the world market, the real appreciation against the dollar (which reduces gas price at the pump), India dumping 6 million tons of sugar on the market, the mills starting panic by fixing the sugar price before October expires, the funds increasing the short position they have even further (last Tuesday they were at 149,000 lots). Out of these, the most feasible would be the oil drop, but this would be supported by the cost of shale gas.

The 32nd Intensive Course on Futures, Options and Derivatives – Agricultural Commodities will take place in three weeks, on August 27 (Tuesday), 28 (Wednesday) and 29 (Thursday), 2019 in São Paulo, SP at the Hotel Wall Street near Paulista. We have managed to make another five spots available. More than 1,000 professionals on the commodities market have already attended what they think is the best course on agricultural derivatives in Brazil. Don’t leave it to the last minute. The next one will be only in 2020.

Have a nice weekend.

Arnaldo Luiz Corrêa

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