The week was made shorter because of the 4th of July holiday in the USA, celebrated this Friday. The first maturity traded at the NY exchange – now October/2020 – closed out Thursday at 12.24 cents per pound – an increase of almost 14 dollars per ton against last week’s closing. All the other months along the price curve which runs until 2023 closed out in positive territory, with fluctuations between 5 and 14 dollars per ton over the week.
The performance of the commodities over the week was positive. Gas, corn, ethanol in Chicago, coffee, cotton and sugar closed out with an appreciation above 5%; WTI and Brent oil came very close to that. In Brazil, the real closed out at 5.3600 (on Thursday) accumulating a 2.3% fall over the week.
There were no startling events within the political national scenario that could affect the dollar. That goes to show that when Bolsonaro keeps his mouth shut, the country has indescribable benefits. Unfortunately, nobody should expect this temporary silent period to go on for a long time because a lot of stormy clouds should still hit the “Palácio do Planalto”.
The delivery of physical sugar on the maturity of the futures contract of July/2020 last Monday was exactly what had been expected, that is, uneventful – a little over 250,000 tons from Center-South.
We have come into the second half of the year walking on a tightrope very carefully. The recently released report by the International Monetary Fund (IMF) points out that we are facing a unprecedented historical crisis and whose recovery will be stressful and uncertain. The shrinking number of jobs worldwide, converted into number of hours worked corresponds – according to the same report – to a loss of 300 million full time jobs. That’s sad.
The ripple effect this state of affairs should have on world consumption will be felt over the next months. We still haven’t been able to size up the dimension of this wave. As we said here last week, the IMF has a much more pessimistic view than that of most economists. Or is it realistic?
The fact is that sugar consumption is falling all over the world (processed foods, beverages, soft drinks) while the stocks are piling up, lockdowns and distancing remain and on our market white premium obviously plummets. If the premium falls, the margin of the refineries shrinks and the demand for raw sugar evaporates – any surprises? None – and fuels follow suit.
However, the mills have been doing their homework well, anticipating and fixing. Having been following sugar pricing for mills’ export for ten years, this is the first time we have had a situation where there is a reasonable volume already fixed for the next crop, that is, mills fixing sugar prices in NY more than twelve months earlier. That’s a rare thing to happen.
The mills are more aware of the need to have a risk management focused on the result and have been totally committed to executing on that. Up until May 31, 2020, a total of 3.3 million tons of sugar has been fixed for the 2021/2022 crop at an average price of 12.10 cents per pound, equivalent to R$1,456 per FOB Santos equivalent ton, with pol.
A great amount of the fixed volume occurred during the speedy devaluation of the real against the dollar in April and May, just when the quotations in NY were plummeting in cents per pound.
What we have to follow up on this quarter that is starting now is the oil price on the foreign market, which should have great difficulty staying above 45 dollars per barrel due to the global GDP retraction as well as the actual behavior of consumption.
Over this period, we will also see – due to the start of the campaign for Trump’s reelection in the November elections – some hardening on Trump’s speech against a common enemy in line with the thought of most of his electorate: China. So, we shouldn’t rule out an exchange of accusations and significant worsening in the relations between the two countries and, therefore, an increase in the instability on commodities and risk markets.
With the pragmatism we prefer to deal with things, we believe that there is no positive perspective right now for the sugar and oil consumption (yes, we sound like a broken record). And the rhythm of sugarcane crushing in the Center-South is pretty fast, which seems pretty obvious to conclude that those who sell and fix sugar earlier will have better result.
Our opinion is that we will come to the end of the crop with sugar carry-over reactively high. Since the mills have chosen to maximize sugar production, it’s reasonable to assume that we might have difficulty with ethanol availability at the end of the crop. But, not fixing or producing sugar now to earn with a possible appreciation of ethanol at the end of the year makes no economic sense, because the ethanol market would need to increase by at least 250 points to match sugar right now.
As paradoxical as this may sound, although many analysts are estimating a maximum production of sugar in the Center-South, there is agreement that there might be a shortage of ethanol, but nobody wants to produce ethanol because they need money now and sugar is more profitable.
Industrial consumers should put off buying sugar. They aren’t afraid of product shortage and they know consumption is adrift. Why hurry?
Anyway, a market full of so many uncertainties is a field day for those who like to look for operations that address the unexpected. A scenario where small little black swans start to lightly peck the shells of the egg where they are in order to fly for the first time and catch the unsuspecting ones with their pants down.
Have a nice weekend everybody.
Arnaldo Luiz Corrêa
