Are We Heading For A Sugar Shortage?

The week should be really interesting here in NY with all the cocktail parties which will take place to celebrate the sugar week topped off with the 66th Annual Sugar Dinner on Wednesday at the Waldorf Astoria. Apart from the fact that the menu will be the same as the last 65 editions, at least the conversations promise to be very lively. They will be about the joint venture between Cargills (CARG) and Copersucar, for instance, and now the not less important rumors of a possible buyout of mills that belong to Bunge in Brazil by Südzucker, the largest sugar producer in Europe.

We must take off our hats to the foreigners investing in the sector in spite of the total lack of transparency on the part of the federal government about fuel pricing policies. What would outweigh the risks? Buyout price lower than the cost to build a mill from scratch (greenfield) and trust that despite the state myopia things will have to follow a pretty diverse path on which we are living today. That may be - especially if there is a chance that the party that has been in charge for twelve years will lose the elections.

The futures sugar market in NY had a quiet week. July/2014 closed the week at 17.20 cents per pound, a 25-point drop (5.50 dollars per ton); the other months until October 2015 all showed drops between 4 and 21 points, between 1 and 5 dollars per ton. From March 2016 on, the prices were slightly higher. I wonder if the market thinks 2016/2017 will be firmer.

About this issue, it is worth commenting that some figures about the refining capacity of gas A in Brazil, the production capacity of ethanol, and the logistics limit at Brazilian ports to import gas along with and analyzed with the viability difficulties for new projects and short-term solutions (two years) flow into the dangerous, shaky ground. Brazil is really in danger of a shortage of supply for 2017/2018. This bomb will go off on the lap of whoever wins the next elections.

The figures are preliminary, but the scenario can be worrying. How do you work out this problem? Demand decrease through prices with incentive to production (transparency on pricing). Experts in the sector think this imbalance, if it does happen, might last 6 to 8 years and that is how long it takes for a greenfield to reach its full capacity. Over a year ago we said here that there was no surviving without transparency on fuel pricing and domestic price alignment with international prices. Since Dilma thinks she and her tutor invented the wheel, the fire, the sky and the stars, she must also think she can tackle this problem standing on her head. Meanwhile, Brazil has been sinking faster than the Titanic did.

Funds have reduced their long positions to 94.000 lots, or about 4.7 million tons equivalent. This week our clients were given data by Futures Analysis Consultoria, with which Archer has a partnership, stating that “the average purchase value of sugar funds is 17.20 cents per pound. A further fall – and its persistence – could make funds reduce their long positions considerably and therefore push the market even further down. The funds must have liquidated close to 15,000 contracts.

The physical sugar market is still sluggish, allowing the product to fall even further. The increased pressure on anhydrous and hydrous ethanol due to the good milling at the beginning of this harvest has also contributed to this fall. So, both anhydrous and hydrous are already working in the red if we take into account the financial costs of the mills.

The eighth estimate for volume fixation of the mills, according to Archer Consulting model, shows that 54% of the harvest is already fixed at the average price of 17.43 cents per pound, with polarization premium. This value amounts to an equivalent fixation of 40.50 reais per pound without pol. The average dollar obtained by the mill, according to the same model, is 2.3122.

According to the estimate by Archer, out of the price paid per liter at the gas station, 40% refers to gas A cost, 37% is tax, 11% refers to anhydrous ethanol (which is blended) and the remaining 12% refers to the margin of the distributor, resale and freight.

Good business for those who are in NY for the Sugar Dinner.