A Close Look At Sugar

The week was absolutely tedious with the NY market trading at an interval of prices restricted to 10-to-15 points for hours. But then Friday came and the market decided to do something. With the funds sitting on a position of almost 115,000 lots sold, any cold can quickly turn to pneumonia. Almost 6 million tons equivalent of sugar short, a record. However, it is good to note that the funds need to sell an ever-growing quantity of lots in order to move the market one-point down.

NY traded at 18.15 cents per pound on Friday, the highest print in the last 13 sessions, closing the week with a positive variation of 38 points or 8.38 dollars per ton for May 13, closing at 18.03 cents per pound. In the remaining months the variations were positive up to Oct 14, just a little, between $1 and $4 per ton. And a slight drop from Mar 15 onward, less than $2 per ton.

On Friday there was a deal (300,000 liters only) of hydrated in the cash market at R$ 1.5700 per liter including tax, which is almost 22 cents per pound sugar FOB equivalent. An excess of rains and fear of greater delays in this beginning of harvest may have encouraged the buyer to buy at this price. True, it does not represent the market but it puts everyone on notice. Hydrated at 400 points premium over sugar is a rare thing.

The global surplus continues to give a bearish tone to a market that cannot resist a price increase for long, attracting good volume of price fixing. This is a fact. The beginning of the Brazilian harvest limits any visit to the 19-cents-per pound territory. Thailand ends its harvest with a production of 9.6 million tons, exporting more than 7.2 million. The vulnerability of the enormous naked short position of the funds plus rains and delays may change this gray scenario of prices.

The deregulation of the Indian market will modify the manner by which the sugar deals are done in that country. The main global trading companies are aware of possible market opportunities in that market which should get new foreign participants with possible acquisitions of small to medium size mills. Things will change. The government authorized the mills to sell their sugar production in the free market, without restrictions, of something that had been controlled for decades. The sugar sector in India will experience a long period of consolidation and growth. Some estimate that that sector may double in size within five years. Brazil had better be careful.

The hydrated ethanol futures contract at the BM&F Bovespa shows an open position of only 2,750 lots, not too much. The volume has been small in face of the hedging needs of the sector. And we have the difficulties to utilize the NY sugar contract to attend to a possible hedge of ethanol anhydrous and hydrated due to a low correlation between the prices negotiated in the cash market of these products and the futures sugar market in NY. For instance, the hydrated correlation with NY this crop year has an adherence of 0.5321. This means that if someone used the NY market to hedge their hydrated erred on 47% of the times, if you will. With anhydrous this err goes up to 75%. A difficult risk to manage. We have had in the past these correlations near 95% back in 2010/11.

There will be a new price increase for gasoline. The president of Petrobras discarded a further increase on prices. An attentive reader alerted that in reading the minutes of the Copom, he noticed that the Brazilian Central Bank has been working with a forecast of a 5% increase on prices accumulated for 2013, which has therefore happened already.

The production cost for sugar in the Center South has been escalating in the past five years. Converted in Reals per bag ex-mill the average cost in 2008 was R$ 21.5881 per bag. In 2009 it jumped to R$ 22.9162 per bag, a variation well above the CPI that year, which had a negative variation of -1.71%. In 2010, the cost went up to R$ 26.7492 per bag. In fact, in the last three years the production cost steadily went up above 16% per year. Last year it was R$ 36.4206 per bag. On average, the cost has been rising at 2% above the CPI. The second estimate for the 2013/14 crop for the Center South divulged by Archer Consulting to its clients on April 1st is 585 million bags, with the production of 36.406 million tons of sugar and 24.748 billion liters of ethanol.

Have a good week.