One cannot help but feel optimistic about Brazil next year. All economic indicators are more positive than what was expected. The business environment has begun to live with the lowest interest rate in recent history. There is a real possibility that structural reforms will pass in the first quarter of the legislative year. The feeling is no different within the sugar-alcohol sector.
For example, Moody’s, risk and credit agency, has changed its perspective for the sugar-alcohol sector from negative to stable due to the improvement on the EBITDA which reflects the good ethanol prices obtained during the 2019/2020 crop. Curiously enough, however, they think the difference between the price of the two products (sugar and ethanol) will only converge in the next 2-3 crops! Whatever that means in the agency’s calculation, it seems clear that it assumes that ethanol and sugar margins will at least remain stable for a couple of crops, which we also agree on.
Ethanol consumption view is very good in view of the growth of the Otto cycle, which has shown to be consistent and vigorous with an upward bias. If consumption has gone up by 2.63% in the 12-month accumulated and by 2.63% in the nine first months of the year, it is reasonable to admit that this number can reach 5% by the end of the crop.
Though the total fuel consumption, in the twelve-month accumulated, has reached a record volume, 60.3 billion liters last September, equivalent gas consumption is still 1.2% below the greatest volume reached in 2015. There is a restrained demand which with the improvement of the buying power of the middle class will make this volume soon be reached.
However, optimism in consumption will face a setback. Important analysts in the sector believe that the ending stocks of hydrous this crop might come down to just 8 consumption days. Evidently, this will reflect on the prices of the product in the second half of January at the latest and ethanol price can go up another 5-10%, also according to the same sources.
Sugar in NY has been recovering more shyly, but with some coherence. March/2020 closed out Friday at 13.50 cents per pound, about 7 dollars per ton above the previous closing. The position of the funds released by CFTC showed that, based on last Tuesday’s numbers, the funds changed over and are now long by 13,500 contracts, which means they have bought 90,000 contracts and moved the market just 60 points.
That the sugar market is more constructive is a fact. The funds are now on the side of the fundamentals, which we harped on about so much here. I dare say that most of their repurchases had producers’ pricing in return – not only Brazil’s producers. Futures brokers comment that also here there has been a lot of pricing in cents per pound and in real per ton by using currency hedge (R$ x US$).
So, has the market changed to infinity and beyond, as Buzz Lightyear would say? A little caution – the market may well have lost the selling pressure of the funds; however, if NY comes close to 14 cents per pound, we will undoubtedly see India adding between 700 thousand and 1 million tons of sugar to its exports.
The mills, generally speaking, are parsimonious about sugar sales for export for next year, although the market believes that 30-35% of the selling volume for the 2020/2021 crop has already been fixed. The low fixing percentage shown by the Archer Consulting model last week seems to reflect this concern of the mills, that is, should they produce more ethanol or more sugar? If the sugar in NY doesn’t approach the price parity of the hydrous, we will see a substantial reduction of sugar availability in the Center-South, and this will push NY upward.
If the real, due to the improvement of Brazil’s rating, points toward R$4.0000, which theoretically reduces Petrobras import price and makes gas to consumer cheaper, pressing hydrous. It so happens that to counterbalance this expectation, energy market analysts believe that a new cycle of high oil prices will soon be on. So, a possible currency appreciation might have zero impact.
The one-million-dollar question is whether the funds will continue buying. We will have to wait for the market to open on Monday. Over the last weeks, the market has given the best-structured mills the opportunity to buy puts, with low volatility, to protect at least the production cost, or the budget value or even a satisfactory EBIT level. This opportunity can repeat itself. It’s important, as usual, not to fall in love with the market because it is too unfaithful – it gives and it takes away.
The focus should continue on pricing taking into account the currency (real). But what if after I fix the sale of my sugar, the market continues going up? If you believe in this possibility, there are several hedge alternatives or participation in the high trend. Get some guidance in order to choose the best one. But I don’t know any company which has broken by selling its product above the total cost.
Look at what has happened to the coffee market over the last twenty days. It went up abruptly and irrationally and nothing in the fundamentals had changed. The funds started buying, pulled the stop trigger and hit those that were naked short in the calls; panic set in and there were also poorly-structured OTC operations; it was a bloodbath. On Friday it seemed like those who had to spit the position out had already done it, the market plummeted by almost 6% and next Monday another dose of panic can occur on the market.
Well, but what can go wrong so 2020 won’t be that rosy? Paraphrasing John Lennon, “the market is what happens to you when you are busy making other plans”. World crises, financial crises, a political crisis, a melting of commodities, a recession, a twitter from Trump, a Bolsonaro’s comment; in short, we are always walking on thin ice.
This is our last comment of the year. It’s time to recharge the batteries for a year which should be promising. It’s also time to thank our clients, friends, and readers for the support they have given us for more than 10 years. We will discuss the most relevant issues of the sugar-alcohol sector again in the first week of February/2020. I would like to wish you all Happy Holidays and an auspicious New Year.
Arnaldo Luiz Corrêa
