The NY sugar market fell up to 17 dollars per ton in the months that reflect the 2015/2016 harvest in the Center-South, and slightly less than 16 dollars per ton in the following harvest. The world macro scenario, with the strengthening of the dollar, knocks down all commodities. Only this July’s accumulated, until Friday’s closing, oil had fallen almost 20%, wheat plummeted by more than 16%, sugar shrunk 10%, soy oil 9%, ethanol in Chicago 8.5% and coffee 8%. It has not been easy for anybody.
WTI oil market traded in NY, for instance, reached the lowest price in the last twelve months last Wednesday - 47.96 dollars per barrel. The average gas price on the foreign market, based on values collected last Monday, was R$3.6092 per liter. The average traded price in the Center-South was R$3.2400. Therefore, there is a 10.23% lag against the price traded abroad. A gas price increase would be welcome by ethanol producers, who would see their product appreciate. However, the dilemma Petrobras (NYSE:PBR) is facing now is that a price rise will harm the fast-dropping consumption of fuel even further.
In July/2015, fuel consumption in Brazil reached 4.83 billion liters, a 9.6% increase in relation to June last year. Nevertheless, gas A consumption dropped 5.9% over the same time period. Although in the yearly accumulated in comparison with the same previous period the total fuel consumption had gone up 5.59%, over the six first months this year we can see a slowdown, which should bring this growth down to 1% on an annual basis by the end of this year. The worst expectation for consumption growth makes us estimate a decrease of one billion liters of ethanol and hydrous.
The freefall of the real against the American currency also helped sugar in NY follow its long and apparently endless path to lower and lower levels. The real hit 3.3470, the lowest quote over the last twelve years, while the futures sugar contract in NY, the first trading month October/2015, reached 11.35 cents per pound, the lowest 11.12 cents per pound traded last month. However, the traded value in NY converted into real per ton FOB equivalent is above the low for the last two years. Based on this Friday’s closing, with NY closing the session at 11.24 cents per pound and the dollar at R$3.3470, the value in real per ton is 863. 2015 average is R$899 per ton, 2014 average was R$879 while the lowest price was R$724 per ton in September/2014 (see chart).
Can something hold back this market? That is hard to say. The amount of crushing over the fortnight was disappointing: less than 29 million tons in a week, which had as an average 41.3 million tons over the last five harvests. Usually, this week’s accumulated has represented over the last five harvests 41.6% of the crushed total in the respective crop year, that is, if we extrapolated this number, the 2015/2016 harvest would come to 550 million tons at the most. It is too early to talk about this, but it is amazing for those who visit the countryside of Sao Paulo to see the cane field with lots of flowers on the top of the sugarcane. A phenomenon called pith, which dehydrates the culms, generating weight loss, increase in fiber and decrease in sugar extraction by the mills. After this process occurs, there is nothing to be done. Some producers say that blossoming is affecting up to 10% of some areas.
Some other arguments, which can bring the market down (do not forget we are far from the lowest in real per ton): the funds are short sold by about 60,000 lots. Being sold at this volume at 15-16 cents per pound is one thing, but at 11.50 cents per pound is much more vulnerable.
BM&F Bovespa has recently launched a futures crystal sugar contract (150 maximum color ICUMSA), quoted in real per 50-kilo bag, in 25.4-ton lots (equivalent to half of the NY contract), with maturities (financial settlement) coincidental with the NY exchange. BM&F Bovespa promises that market makers will get onto the market at full strength in the third quarter of this year to bring liquidity for this contract and for the hydrous contract for the daily last two hours of the session. Even though both contracts do not provide physical delivery, which has always been a controversial issue on the part of the BM&F Bovespa, the fact is that we can see an important tool to take advantage of arbitrages and even compensate for washout operations, which can come up on the physical market of both products being born.
For those who bet on what would fall below 10 first: the percentage of the positive evaluation of Dilma’s PT government or the sugar market in NY in cents per pound, the “creature” created by Lula won out. With 7.7% of excellent and good ratings, probably given by those people who live a faraway galaxy, Dilma beat the sugar market easily and gets to the utmost mediocrity as the worst president in the history of this country. What a legacy! However, it will get even worse over the 1,256 days to go before we can get rid of this sect of worthless people.