Is Sugar Market At A World Cup Pace?

The Sugar market in NY closed the week rather valued. July/2014 closed Friday’s session at 17.92 cents per pound – an 88-point high over the week - representing an appreciation of a little over 19 dollars per ton. The other trading months also showed good appreciation which ranged from 45 to 90 points or between 10 and 20 dollars per ton over the week.

The sugarcane harvest for Central-South is starting to get more realistic shapes. Most analysts are converging to 575 million tons, which is pretty close to the number Archer has been working with since April, that is, 575.5 million tons, with a production of 32.8 million tons of sugar and 24.7 billion liters of ethanol.

The total milling volume for the Central-South released by UNICA reached 117 million tons for the first quarter in June. That is the same as the crushed volume over the same period last year. For the last six sugarcane harvests in the Central-South, the accumulated crushed volume for the first quarter in June represented over the harvest ahead 19% on average of the total volume of sugarcane at the end. Based on this simple methodology, could we say that the sugarcane harvest in the Central-South this season would reach 618 million tons? That’s hard to believe. But if we think the percentage volume is the same as the accumulated previous harvest, we come to 575 million.

Ethanol sales over the first two months for this harvest, according to UNICA survey, reached 3.59 billion litters. For the last six harvests, the volume sold in the first two months represented between 14.9 and 17.0% of the total volume of the respective year. Thus, extrapolating to the current harvest, we would reach a yearly volume of 23.3 billion liters for the internal market.

The 19.50-straddle for March/2015 is being traded at 250 points. That means that selling the 19.50 cents per pound strike price for both put and call option for March/2015 makes it possible to collect 250 points. If the market goes up, you are short at 23 dollars per pound; if the market falls, you are long at 17 dollars per pound. It could be a good strategy to sell the straddle if you don’t believe in great fluctuations.

The cost for sugar production gathered by the Archer Consulting model is R$36.2723 per bag at the mill. Anhydrous and hydrous costs are R$1.1191 and R$1.0723 per liter, respectively, at the mill as well.

Based on Friday’s closing, the result estimate for the mills for the current harvest is a US$7.34 profit per ton of crushed sugarcane – about a R$9 billion margin. Now compare this value with the sector’s debt of R$57 billion.

The market volatility over a 50 day-average is 22.17%. The average for 100 days is 29.12% and 24.38% for 200 days. This goes to show that the market has had few fluctuations (20.41% over 20 days) even reflecting on the options. It could be a good moment for those planning to build a speculative position to take advantage of eventual appreciations of the market, be it due to the weather or smaller sugarcane production. This type of strategy is cheaper.

The market has been at a World Cup pace - a lot of people enthusiastically crisscrossing the country after they have gotten tickets to see games such as Japan X Greece, or Honduras X Ecuador. A Cup filled with surprises: favorite Spain’s elimination and Costa Rica’s classification, sending home two world champion teams. Could this be Netherland’s turn at last?

Archer is promoting the 1st Advanced Course on Agricultural Options, attending to requests from various agribusiness segments. It will be a 2-day course focusing exclusively on options about agricultural commodities. The course will be held on July 29 and 30 in São Paulo.