Ethanol And Sugar: In Bad Shape

The NY sugar market closed the week dropping 61 points for May/13, or a little over 13 dollars per ton. The remaining months that serve to fix the 2013/14 crop closed lower 10 dollars per ton. During the week, May/13 reached 17.25 cents per pound, the lowest level in 700 sessions. Since July 19 2010 we had not seen a market with levels this pressured.

The pending price fixations against the first month, which expires this coming Tuesday, weighed during the week. Many people held back on the fixations betting on a betterment of the market maybe helped by lower taxes for ethanol, so that on Friday they dumped everything that had to be fixed. It could be that after the deliveries the pressure will diminish, but the market remains low, with weak demand and in a bad mood.

Announced with the usual fanfare by the governing workers’ party, the measures to help the ethanol are really insipid and change absolutely anything regarding the status quo, demonstrating once more that the sugar and ethanol sector is in bad shape if it is still depending on the government intelligence to have something that will improve the perspectives for them. Lower taxes will not resolve the problem and once more all that is done is like one’s attempting to hide the sunlight with a sieve, if you will. We got to a point of distortion or despair, I do not know, that even the serious people are asking for the return of the CIDE, so as to make the ethanol more competitive. This is like the guy that decides to jump from the 6th floor as opposed to the 10th floor in order to save himself. No use, he will likely die and it will be even quicker.

Little Can Move This Market
To complete this bleak scenario, the ethanol price fell during the week, the real devalued against the dollar, the weather is really favorable in this beginning of crushing and the phones have not been ringing much in the avid sugar sellers desks. In other words, a Hitchcock movie in the making. As we have said here in the commentary, only exogenous factors such as weather or port congestion may move this market upwards, close to 20 cents per pound. But not all hope is lost. Talking to a well-known technical analyst during the week, I was surprised to hear from him that the market “should recover and see near 21 cents per pound on the Oct/13 expiration month”. It is easier to find Wally than a bullish person these days.

Going back to the government measures, the fact is that there is no intelligent solution for a sustainable growth for the sugar and ethanol sector that will not contemplate the free market. For the sector to grow and attend a potential demand estimated in more than 380 billion liters accumulated for the next 10 years, the gasoline in Brazil will have to follow a formula that reflects the prices in the international markets. Aside from this, we will keep on drying up ice.

Scarce New Capital
In this current scenario, unless an adventurous investor shows up, there will not be one cent coming from fresh investments, be it from local or foreign investors. As long as the owner of the capital is not absolute sure about the rules of the game and about the price formation of the ethanol, investments will not occur. While this does not happen, and I think it will only when we have in power a government that has people with the political will and unquestionable management ability to have a frank dialogue, all we will have is a game of hot potatoes with the problems never being resolved. I sympathize with those that need, due to their job description, to sit down in the negotiating talks with these people. Only by taking a strong dose of an animal tranquilizer or possessing a liver of stainless steel, can one sit and hear all the nonsense coming from them.

If the global sugar consumption grows 1.5% on average for the next 10 years and Brazil keeps its participation in the international markets and in addition we have an internal ethanol consumption of 48 billion liters, we will need to crush in 2023/24 conservatively approximately 1 billion tons of sugar cane, against the 640 million tons that are being crushed annually today. In other words, the sector will need something like 100 new producing mills with a 4 million tons average crushing ability until then. On average, we will need investments around 5 to 6 billion dollars per year.

Surprisingly, the volatility is still dropping. The 20-day annualized (in the period of March 26th to April 23rd) is an incredible 14.89%. Note that the interval between the low and the high in these last 20 sessions was only 68 points, only 3.83% of the average closing in the same period. The last time we had an oscillation this low, was in Oct/97 at 3.80%. And the lowest since 1961 has been 3.13%, when in that year the market oscillated only 9 points in 20 days. Out of the more than 13000 sessions in the sugar market since its current version, in only 26 of them the oscillation was lower than 3.83% of the average of the closings of a moving period of 20 days, or in only 0.2% of the time. This is only to point out the singularity of this moment.

Have a good week.