Increasing Consumpton Keeps Ethanol Prices Up

The futures sugar market in NY closed the made-shorter-by-Easter week at 16.6 cents per pound for May 2014, a 14-point devaluation against last week’s closing – just a 3-dollar drop per ton. July and October 2014 also closed at smaller drops, between one and three dollars per ton, while the other months closed at a small positive variation.

The week had its ups and downs. May/2014 even traded at 16.50 cents per pound and at the next session appreciated 74 points (over 16 dollars per ton). May/July spread, as brought up here last week, traded at a cost and carry equivalent discount of more than 25% a year. An experienced market trader countered the value presented here arguing that it would not be possible to take delivery of May sugar and redeliver it on the next maturity date because the sugar would have to be shipped by July 15 at the latest, and therefore could not be redelivered (within the limit) on September 15. But here the substitution issue comes into play, that is, you do not have to deliver the same sugar but any sugar in the trading company books. And here another issue stands out: what if the trading company does not have any position? It is a valid argument, undoubtedly. But you do not lose to whoever is at the end of the industrial consumer, for example. Not buying now means – yes, indeed - paying over 25% a year on the next maturity date.

The sugar export market is still slow, but the discounts on immediate shipping were around 5 points, according to a physical market broker in São Paulo. Now, the ethanol market is still hot, which should not make prices fall sharply at this start of the harvest. As we have said here over the last weeks, fuel consumption has been growing at a fast pace in the country. Hydrous consumption closed in February/2014 for the full 12-month period was 11.1 billion liters, 14.29% above the same period last year when it hit 9.7 billion liters. Anhydrous was even greater: a 28%-growth against a full 10.1 billion in February/2014 and 7.9 billion over the same period last year. All in all, fuel consumption grew by 7.47% over the year.

Those who watched Petrobras president’s deposition at the public hearing in the Federal Senate about the shameful purchase of Pasadena, heard the executive from the government-owned company drop this pearl of wisdom: “gas price increase is a prerogative of the Petrobras board”. The company imports gas at a much higher price than the price it resells at to fuel distributors, gradually hemorrhaging company finances and its president comes out with this cock-and-bull story that price is up to the board to decide on. PT will do whatever it takes to get Dilma reelected, be it make Petrobras go bust or Brazil go bust, for that matter.

It was even worse to hear Petrobras president assert that the sugar-alcohol sector is going through this crisis due to a lack of investments. The truth gets twisted shamelessly, as usual. The sugar-alcohol sector has been the victim of the preposterous price policy of Petrobras. According to the Archer Consulting model, taking WTO oil closing at US$103.37 a barrel as basis, gas should cost R$3.31 a liter at the pump today, implying that ethanol would be able to compete at R$2.3170 a liter. The government policy makes the sector have to subsidize gas and puts the burden of the increase in ethanol price on the mill owners. All you have to do is go on news sites and check out the readers’ comments complaining that the millowners have increased ethanol price. The consumer does not understand that ethanol is not expensive, but actually that gas is subsidized. Thereshould be acampaign to set the record straight on this and therefore pressure the government.

Finally, there is some good news for the sugar-alcohol sector. Roberto Rodrigues, one of the most admired representatives of the Brazilian agribusiness, will take over the presidency of the UNICA Council, left vacant by Pedro Parente, president of Bunge in Brazil, who will leave the multinational by mid-year. Roberto Rodrigues should fill up an enormous void of leadership and representativeness which the sector has been short on over the past years.

The shoemaker’s son always goes barefoot. It would be funny if it weren’t tragic. Just think, dear readers, ICE (the Inter Continental Exchange), where the raw sugar contract in NY is traded at, acknowledged in its balance sheet for 2013 a US$190 million-loss due to the real devaluation which affected its 12% shareholding at CETIP (Brazilian company listed at Bovespa, depository of bonds and securities). The company explains the million-dollar loss by saying that the investment at CETIP was made in reais. The curious thing here is that ICE itself has among its financial products offered to the market for hedging, the real. And even if it did not, it would have the tools to mitigate or eliminate this risk. It is unbelievable.

The world has lost one of the greatest writers of all times, Colombian Gabriel Garcia Marquez. Watching an interview by him, a few years ago, I couldn’t help being surprised when he let it slip that when he was writing One Hundred Years of Solitude and Love in the Time of Cholera he would play Beatles’ A Hard Day’s Night and Help! on his record player. He will be missed! R.I.P.