An Eye on the Market And Another Eye On The Brazilian Real

After the Sugar delivery on expiry of the NY contract for October/2014 this week at about 10,000 contracts – a lot lower than what the market had anticipated during the weeks before maturity – the futures sugar market in NY closed this Friday basically unchanged against last week.

The most curious thing about this delivery is that only 120,000 tons of Thai sugar ended up being delivered (a great amount of the low-quality sugar, which would have the exchange as its final destination had not been sold to China before maturity). March/2015 closed the session at a slight drop against the previous week.

The implied volatility in the sugar options traded at the NY exchange keeps on dropping. With the expectation of a stronger American economy comes a widespread feeling that the commodities will have a tough job of recovering from the setback it went through recently and so, on market participants’ minds, there is a limit to a possible sugar appreciation. For example, last quarter commodities depreciated heavily. Coffee was the only one which escaped this massacre at a 22%-high. Soybean Oil dropped 29.1%, soymeal 28%, Corn 21%, Wheat 17.5%, soybean oil 15.6%, oil 12.6%, sugar 10% and so forth. A strong dollar does not go with high commodity prices.

Future ex-minister Mantega has signaled that there will be an increase in gas price in November. Hence, the support of Brazilian sugar prices rises psychologically on the foreign market, backing up the idea that we should have less available sugar at the start of the next harvest. So, according to the arbitration of the two products, sugar price would have to increase a little further. According to survey data by Archer Consulting, fair gas price at the pump should be R$3.206 per liter, that is, we have a lag of about 11% in relation to the price of the foreign market. If there is an increase, it shouldn’t exceed 5%.

World sugar production has been at a standstill for four years. Take the data from the U.S. Department of Agriculture (USDA) on the 2014/2015 harvest and compare it to the average of the three previous harvests. There has been an increase of only 500,000 tons. By this criterion, Thailand grew 450,000 tons, Mexico 400,000 tons and the rest of the world 900,000 tons. On the other hand, Brazil has had a 700,000-ton drop and Russia a 600,000-ton drop. Now, if the comparison is made only using the 2009/2010 harvest (5 years ago), the production grew 22 million tons, led by India with 7.3 million, Thailand with 4.0 million, China with 2.2 million and the rest of the world with 5.2 million. Australia stands out with 300,000 tons when it comes to the fall.

As for consumption, the numbers are different. It increased 6.8 million tons using the above criterion as well. China and India led the way with a 2.1 million- and 1.9 million-ton increase, respectively. The rest of the world completes the growth.

Bottom line is that the foundations are constructive and we cannot rule out a marked improvement on prices in cents per pound (via appreciation of the real if some serious and committed to Brazil person gets elected to be President). When it comes time to hedge, it is essential that the value in reais per ton be looked at. Many companies must look favorably at pricing which is at about R$950/1,000 per equivalent ton FOB.

A mill owner distressed about the political situation in Brazil and scared of the economic perspectives for 2015 wittily got it off his chest, “I won’t just throw it all to the wind because later I myself will have to pick up the pieces”.

Petrobras ex-director, Paulo Roberto Costa, has promised to return R$70 million he stole from the saves of the company after plea bargaining. If this runt has agreed to give back this huge amount, imagine how much the incognito head of this criminal gang has embezzled. Shame! Brazil is a country where being honest is synonymous with being a sucker.