Despite Ambiguities, Commodity Market Hangs Tough

The futures sugar market in NY closed this Friday at 17.98 cents per pound for May 2014, scoring a 112-point high in the week, or 25 dollars per ton. It might look like businesses on the physical market have been strong, right? You wish. It is much more like a speculative technical movement than any actual change in market fundamentals. Premiums on the cash market continue deteriorating while sugar from different origins abound.

The real strengthens right after Brazil has had its credit rating lowered. There’s no understanding this market logic. Thus, real closes the week at 2.2590 – a 7.25% drop since the 2.4359 high late January. Due to the exchange, sugar closed the week at R$929 per ton, a drop higher than 5% against the value the market was working with two weeks ago: R$981 per ton. If the dollar appreciates, we have no doubt that the refineries will fix their sales again if the value in reais is close to 950/1000 reais per ton.

It is true, however, that the market sentiment is more constructive. The prediction number for harvest between 570-590 million tons, rumors that gas price will go up soon to help out the Brazilian state oil company with its finances, ANP’s signaling that the blend of anhydrous in gas might increase to 27.5% from its present 25% and the funds appetite staying at 90.000 long sugar contracts in NY before rising to up to 100 points since Tuesday, contribute to a more pinkish scenario for the dark skies we have seen in the sugar-alcohol scenery in recent times.

The second Archer’s estimate for the 2014/2015 harvest places the Center-South production at 575.5 million tons, divided between 32.8 million tons of sugar and 24.67 billion liters of ethanol. The number is almost 2.5% lower than that of the previous estimate because the company had access to data collected in the producing regions and is a lot more worrying than the previous one.

Undoubtedly, the impacting news this week was the Joint Venture of Copersucar and Cargill. The two giants will join their trading operations into a new company, whose name has not been made public yet. The market was taken by surprise when it is acknowledged that the narrower trading margins in the sector push companies toward consolidation and scale gains. However, no one saw this kind of consolidation coming: the generation of a super trading company with a commercialization volume, according to experts, of 10-12 million tons.

Both companies are complementary and will bring their talents together. One has a huge sugar production and a sophisticated system of its production outflow, logistics, transportation and storage, and the other has access to the final destination and a full, complementary trading structure to the first one (deep knowledge of basis formation, derivative tools on futures options and over-the-counter markets, structured financial operations, to name just a few points).

Having had the privilege, in the past, to work for a total of 12 years for both companies, two great schools for professional training, I see this joint as if Barcelona and Real Madrid decided to come together to make just one team. Soccer (in the analogy, the sugar market) loses out a little, for it now relies on just one big team instead of two, but the new team is now bigger than each individual one. For Copersucar, this JV – which still depends on approval by authorities – is a big step towards the internationalization process of the company started a long time ago, and adds substantial value in case of an IPO. As for the other teams (trading companies and refineries), the joint puts them in a less comfortable situation. They will have to play a lot of soccer!

The JV of the two companies has the small refineries worried about and afraid of ending up with fewer alternatives when they have to negotiate their sugar on the international market, reduced availability for pre-financing, less bargaining power to negotiate commercial contracts and less flexibility to use hedges. On the other hand, an event such as this goes to show that a great number of trading companies have been having great difficulty making money on the sugar market over the last 3 years.

Have a nice week.