Is There Room For Further Drops In Sugar?

The week ended with the expiration of Jul/13 futures. The physical delivery of sugar against the corresponding NY futures contract month ended up being only 144 thousand tons of low quality sugar (from Argentina and El Salvador). It had as a receiving party only one trading company. We can say that the low volume in view of the initial forecasts that called for a monster delivery (upwards of 800 thousand tons) may be considered bullish, or if one is less enthusiastic about it, constructive. During the last session of the week, the spread Jul/Oct was negotiated at 98 points of discount, more than enough to make the potential seller to roll over his short position from July to October, for 3 months therefore, and still pocket around 10 dollars per ton vis-à-vis the carrying costs (warehousing, insurance and financial cost) for 3 months. How many contracts were rolled over? It is difficult to know, but a delivery such as this in July really needs to be considered as constructive, even knowing that the premiums in the physical market appreciated in such a way that prevented any delivery of Brazilian sugar. The bulls got excited, but not much.

With the exception of the expiring month, which said goodbye with a weekly drop of 36 points, or 8 dollars per ton, the remaining months of the curve that now goes to Oct/16, closed slightly higher of up to 11 points. In other words, despite the spreads storms throughout the week, the market closed higher.

Some aspects help or may help the sugar market. More and more, the mills begin to redo their calculations of how much has not been crushed to date due to the rains that have been falling in the producing regions in the Center South. A producer from the Parana state, for instance, pointed to the fact that there has been already 32 days of rains. In Sao Paulo, this figure was lower, but we already hear of a crushing that will hardly reach the 580 million tons. We will follow the numbers closely although we still have kept unchanged our forecast of 578 million tons as divulged in the beginning of this month.

With the perspective of more anhydrous being produced, it is reasonable to think we will have less white available. The results of this perception will be noted in the better premium for the white sugar or at least in their maintenance. Has NY traded its low already? Is there room for further drops? All is possible, but we should not forget that, as mentioned last week, the strength of the US dollar put the price levels in reals equivalent for the sugar traded in NY as if the exchange had appreciated 200 points when compared to the dollar rate at the beginning of May/13. Last Wednesday, the value in reals per ton, simply converting the closing in NY with the dollar rate for that day, reached R$ 869.12, the highest since Jan 15th.

If there is a settling on the exchange rates, what will be the funds reaction? There was not a lot of covering by the shorts mainly in function of the commodities in general which have really been soft in the international markets, but sugar has been weighing. For the record, sugar has already dropped 13.4% this year, and it is slightly better than wheat, coffee and corn, which have fallen 15%, 16% and 21% respectively. A fund manager noted to us that he is not interested in increasing his shorts since he believes there is little downside potential now. We will see it.

The mills, as already noted, took advantage of the better exchange rate to fix their sugars. It is like that since the NY volatility in reals is lower than in cents per pound. In other words, the recommendation for the mills is always to do the exchange rate for the sugar fixes unless they have liabilities in dollars.

Changing subjects, we had in Sao Paulo during the week the 4th edition of the extraordinary event Ethanol Summit, sponsored by UNICA, which once more excelled in terms of the technical quality and the high level of the discussions. It has become, without a doubt, a “can’t miss” event for the sector. Among the main subjects discussed, it was noted the change to occur in the global energy matrix with the US production of shale gas and the effect it will have as a cheap source of energy in the price formation and overall scenario of the clean energy sector in the next few years, besides the likely changes resulting in the global geopolitical picture.

Locally, it was really emphasized the improvement of the productivity of ethanol in Brazil so that the country can compete with new sources of energy, reaffirming our commitment to a clean energy policy. Other discussion points dealt with possible scenarios for 2020, the future of biofuels, the logistical bottlenecks, the issues of bioelectricity as well as questions about technology in general, expansion and opportunities and investments.

What became evident from the discussion of the several issues presented is the colossal distance between the proposals of the sector and the desire to make them possible and the mediocre views of the representatives of the federal government. Some of the issues even provoked dissent and angered some of the participants. What is clear and transparent is the lack of ability by the government to think strategically. The feeling among the participants is that there is no planning and no effort to discuss ideas and measures for the long term regarding the sugar and ethanol sector. For the foreigners present, it was cause for astonishment to hear from one of the speakers “how the government was able to destroy the value of a solid company such as Petrobras in such a short time and at the same time put the sector in a situation that does not stimulate new investments in it”. It is something deserving of a (Ig)Nobel prize in economy!

Two phrases can sum up the event, although completely opposites of each other. The first, from the ex-minister Roberto Rodrigues, a well respected figure in the national agricultural sector and a person who helped to put the sector in the global map, who was also justly honored by the organizers of the event. He said, visibly frustrated by the current situation imposed the government administration, carefully choosing words, “how expensive is the pre-salt in light of how cheap is the post-sugar”. In other words, millions have been spent with the so-called pre-salt, an invention of the ex-president Lula, which has never delivered the promised benefits and in the process has drained all the cash from Petrobras, and no attention whatsoever meantime has been given to the Brazilian ethanol.

The second phrase comes from the adjunct-secretary of economic following, whatever this means, from the ministry of Economy (he works for the minister of Economy, Mr. Mantega). In a failed act and a Freudian slip no doubt, but also showing the contempt by which the sector is usually treated, he said to an astonished audience, that whatever the government does is not “due to a lack of poor effort” on their part. Wrong words said in inopportune moments are seen by psychiatrists as an indication of what goes on in one’s subconscious mind, revealing his untold secrets. If this individual represents the cream of the crop that the government has to send to events of that magnitude so as to seriously discuss the government policies, imagine what stays behind in the bottom of the barrel!