The week delivered a menu of indigestible news coming from all over the place, which contributed to the worsening of the already damaged world macro scenario. Germany – the main economy of the Euro Zone – bordering on recession with the release of a negative GDP at 0.1%, Argentina which has decided to embrace the worst left-wing populism there is in the preview for next October elections, throwing cold water on the financial market and contaminating Brazil, pushing the exchange rate beyond R$4.000. Events like these turn on the red lights on the risk management panel. We should pay extra attention to.
The trade war between China and the United States will never have winners given the symbiosis and intertwining the two economies find themselves in. Now, there are bound to be lots of losers. The world energy market has huge losses this August. Type Brent oil has plummeted more than 10%. Troubled times drive the risk asset (commodities) investor away and seek safer havens, such as gold (which has gone up by 6%). Soft commodities (coffee, sugar, orange juice, cocoa, and cotton) have all fallen between 3.5% and 6.5%.
The bright side of these spasms caused by the political turmoil in the continent is that some better-tuned mills (and with little indebtedness in US Dollars) took advantage of the American currency peaks and executed NDF (Non-Deliverable Forward), locking excellent rates in real for the next months, which will help with the composition of their sugar hedges in NY for the 2020/2021 harvest.
The sugar futures contract for October/2019 closed out the week at 11.63 cents per pound also pressured by the real devaluation. On Friday, August 9, NY closed at 11.86 cents per pound and the dollar at R$3.9420. This Friday, NY closed at 11.63 cents per pound and the dollar at R$4.0040. Sugar value on these two days was 1,074 and 1,070 real per ton, respectively – practically unchanged.
The funds have once again increased the short position and now are at almost 153,000 lots short, without any repurchase concern right now.
The Achilles heel of the sugar market, as we have commented on here several times, is the oil market. With it being on a downward trend, sugar price recovery is at a huge risk because it pressures gas value and theoretically narrows the arbitrage with ethanol, making mills produce more sugar. However, this won’t occur right now for two basic reasons: devalued real means higher gas import price.
The cost structure that makes up the gas price for the Brazilian consumer at the pump carries a great part of taxes and margin of the refinery, distributor, etc. That is, a 10% reduction in the oil barrel price changes the gas price for the consumer by only 4%. In order for ethanol to lose competitiveness against gas, it would be necessary that oil fall beyond 15% (something like Brent being at 50-51 dollars per barrel).
This week, the weekly indicator of hydrous ethanol Cepea/Esalq fuel closed at R$1.7462 tax-free per liter, that is, ethanol is sold the equivalent to NY sugar plus a 205-point premium. What many people on the market question is why sugar has to go up at least 200 points to get mills to produce it and not the other way around, that is, ethanol going up 200 points so that sugar starts getting competitive.
Well, in order for that to happen hydrous would need to fall to R$1.4450 tax-fee per liter at the mill, and even so for it to stay at parity with gas, which allows the consumer to choose to fill up his vehicle with it, oil would need to fall by 19% on the foreign market.
Spots for the XXXII Intensive Course on Futures, Options, and Derivatives have run out. The next one will only be in the first semester of 2020.
Have a nice weekend.
Arnaldo Luiz Corrêa
