Don't Sweat Sugar's High

The futures US Sugar No11 market in NY closed the week at a 54-point high for May/2014, quoted at 17.20 cents per pound at floor trading closing, almost a 12 dollar-per-ton appreciation. But this is nothing to get all worked up about, for the futures market traded on low volume this week: Monday, Tuesday and Friday had average volumes of 55 thousand contracts, with at least 40% of this volume represented by spread operations.

The sugarcane harvest forecasts for the Central-South keep springing up here and there. Canaplan released its estimated harvest at 540 million tons, by far the lowest presented so far. UNICA is at 580 million tons, a number much closer to the market average. Anyway, as we know it, it is always premature to discuss the technicalities each organization uses to make its prediction. Some mills were surprised at the good first crushed sugarcane’s yield.

Despite the consensus that prices should be better in the second semester due to the possibility of a more modest crushing, world surplus reduction, smaller availability of sugar for exports because of the steady demand of ethanol on the internal market and the possible arrival of El-Niño, some companies believe that sugar in NY can trade at 25 cents per pound! I believe this to be more like a dreaming than any fundamental foundation.

The concrete fact is that given the cost of the sugar production, today estimated by the Archer Consulting model at R$35.6798 per bag on average ex-mill. Unless we have some really big climatic phenomenon, NY will have to face, regardless of the value in cents per pound it will be trading at, the real parity per ton close to 950/1.000 reais. The closing on Friday, for instance, shows 885 reais per ton FOB, very low compared to last year’s average. If we set the dollar at 2.3000 we are talking about NY between 18 and 19 cents per pound for the 2014/2015 harvest. Again, if El Niño comes along and this causes delays or crushing stoppage due to the rain that comes with this phenomenon, the high might be even higher. If the mills are working within the limit of their milling capacity, each day of stoppage means about 2.5 million tons of sugarcane which are not crushed.

Once again clearly showing that he does not know how the sugar-alcohol sector works, the Minister of Finance Guido Mantega claimed during the week this is not the right moment to increase the blend of anhydrous ethanol in gas, from 25% now to 27%. Whenever I see the Minister on TV, I immediately push the SAP button to try and understand his peculiar train of thought. He says now that the ethanol has increased its production (sic) – I would think this is a biogenesis process – it is not time to increase the blend. “Harvesting is just starting so ethanol prices will go down”. I pushed the SAP button. So, let’s see, now that harvesting has started and we have more product supply and therefore prices are lower, it is not time to increase the blend? It is hard to understand the logic of this brilliant Genovese.

Let’s stick to the math then. Using the Crude Oil closing in NY on Friday at 100.61 dollars per barrel and the dollar closed at 2.2430 reais last week, the break-even value of gas today at the pump would be R$3.176 per liter. Blending going to 27.5%, this break-even price would drop to R$3.133 per liter. The increase in blending would create an additional demand of 1.1 billion liters and a reduction in gas C basic price by R$0.0430 per liter. For a yearly consumption of about 42 billion liters, this difference means a saving of R$1.8 million a year, which would stop the bleedingof the oil government-owned company finances. But to the Minister the figures must be different.

Be really careful about what you read on the Internet. This week market rumor had it that mill owner Maurilio Biagi Filho hosted a dinner party at his home on April 7 for 250 businessmen from the agribusiness sector, with the presence of Lula, and that a businessman invited to the dinner created an embarrassing situation by criticizing the former president and that made Biagi turn down the invitation to be part of the state government ticket in the elections for governor. That was not what happened. The dinner party was on February 14 at a hotel in Ribeirão. Biagi’s decline was due to three reasons: not being able to not speak his mind (essential condition to join the political life), pressure from his family and his health – it was as simple as that.