Futures Market: Have We Seen The Lows?

One more fire occurred this Friday at the EDF Man Complex in Santa Adelia, in Sao Paulo state, burning 24,000 tons of sugar. Two events of this nature in one-week interval are truly scary.

The NY futures market closed this week quoted at 19.02 cents per pound, returning with interest all the gains from last week, post-fire in the Santos warehouse. Since the high on Oct 18th in the morning, at 20.16 cents, the market has dropped to the low of 18.80 cents per pound, a pronounced fall of 30 dollars per ton. For the week, Mar/14 closed with a 48 points loss (10.58 dollars per ton). The remaining months followed the same pattern lower between 6 to 8 dollars per ton.

The drop in NY on Thursday may be due, partially at least, to some factors. For instance, the assurance from Copersucar after the fire, that they will take care of their logistic problems. Also, the massive exchange of information between traders during the events of the sugar week in Sao Paulo, with many realizing that some of their peers were not well fixed in the futures market in relation to the average of the market. After all, the prices in reals per ton continue high and the dollar has appreciated, making the fixations of future sales for the next crop more attractive.

In general, the tone of the conversations in the events of the week was more constructive. There is no one really bullish but the bears are not so excited as before either. The market may still see lower levels, even below 18 cents, but the consensus is that we have seen the low already, those 15.93 cents per pound, which are now history. The market is seemingly flying blind, as it does not know the funds position. The rumor is that they are 200.000 lots long. The CFTC will take a few weeks to return to normal after the shutdown of the US government before it publishes its commitment of traders report.

It is true that the sector has been fighting hard to survive in a hostile environment as this one imposed by the government. An example of the lack of good will from the government was the declaration of the director of the renewable fuels department of the ministry of energy, Ricardo Donneles, in the seminar he participated during the event DATAGRO. He confronted in an ill-mannered way, the UNICA president, Elizabeth Farina, when he said that “the sector needs to find its space only with an increase of competitiveness, without fighting for the market parity with gasoline”. He also said that “the sector has not presented suggestions for a sustainable growth”.

Even the stones know that this gentleman has never fallen in love with the sugar and ethanol sector and that his well-rehearsed speech demonstrated despise and superiority, and not rarely a lack of posture. He had the chance to apologize later but did not do it. The UNICA president, on the other hand, retorted in a harsh but appropriate way, saying that yes, the sector has presented suggestions and that subsidized gasoline prices interfere with ethanol prices and are scaring investors away. Mr. Donneles has the right to not like anyone. As a public employee, paid by taxpayers, I doubt though that in his job description there is room for the arrogance he presented. It is the case for one to ask for antacids next time he sits down to hear a speech from this person.

Still in that same event, Mr. Donneles also mentioned that Brazil imports gasoline of a low quality to be mixed with anhydrous ethanol for a final sale to local consumers. An important declaration this is. The government has allowed the import of low quality gasoline so that the loss that Petrobras has when selling gasoline locally much cheaper than it imports at, may be then lowered. This is a policy contrary to the objectives on the ministry of energy which says that “it aims to protect the environment and the consumer interests regarding fuels, prices and quality and supply of hydrocarbons and biofuels”. This is Brazil.