Make Your Bets: Sugar Market Surprises, Closes At 66-Point Low

The NY sugar market took everyone by surprise and closed at a steep 66-point low in relation to the previous Friday, hitting 17.28 cents per pound for May/2014. The other months which reflect the 2014/2015 crop closed at lows between 36 and 52 points over the week, that is, US$8 and US$11.50 per ton.

The rain in the sugarcane regions in the Center South is back, the Thai crop is early in relation to last year’s by over two million tons and what was seen on the sugar futures market was a profit-taking by those which had been bought. A few companies which were still holding their sale fixations might have been surprised by the sudden drop and also helped pressure the values negotiated in NY. For many, however, the drop in NY is more like a buying opportunity.

Is the high cycle over? We don’t believe it is. But there are some things that get in the way traced by the bulls. The sugar market for export is at a standstill, with no businesses being done. However, the feeling that we will have a sugar crop way below expectations is increasing. Many trading companies, for instance, think the number will get to as close as 570 million tons at the most. We will get back to this topic later.

The volume of sugar export in January 2014 was 2,137,781 tons driving the 12-month accumulated value to 26,995,067, a 6.2% increase for the period. The average sale price was US$429.35 per ton. Ethanol, however, accumulates 2,744 billion liters for export over twelve months, a 14.7% drop in relation to the same period last year, with an average sale price at US$641.85 per cubic meter.

Well, let’s say Brazil’s exports for the 2014/2015 crop is 26 million tons of sugar which, if we estimate exports for February and March 2014 will come to 3.4 million tons, would close the 2013/2014 crop at 26.7 million tons, that is, let’s consider 26 million tons for 2014/2015 which would represent a drop in sugar exports by over 2.5%. Add the internal consumption of sugar at the conservative volume of 12 million tons to that volume. That is, the potential of sugar consumption in Brazil, export and internal market, come to 38 million tons.

Now, let’s take a look at ethanol. Let’s estimate that ethanol exports for the 2014/1015 crop will shrink to 1.8 billion liters, taking into account that there are long-term contracts. On the internal market, the increasing flee of flex-fuel vehicles creates a great potential for carburant alcohol consumption. The accumulated sales of ethanol in the Center South, up until January this year, so 10 months, show 9,253 billion liters of anhydrous and 12,487 billions of liters of ethanol. Let’s estimate the total number of consumption in Brazil at 27 billion liters.

We must have enough sugarcane to meet the consumption of 38 tons of sugar and 27 billion liters of ethanol. We assume that the average ATR in Brazil (Center South and North/Northeast) is 133 per ton of sugarcane. So the amount of sugarcane to be harvested in the Center South has to be at least 612 million tons. Keep in mind that the above predictions are conservative. If we consider that the average estimate with which the market works today for the 2014/2015 crop is 570 million tons, we are talking about a deficit of 42 million tons in a very conservative way.

To sum up, add to this recipe the excessive amount of rain in July (as reported this week from Australia, the possibility of El Nino), a devaluation of the real which makes gas import more expensive and increases the use of ethanol, arbitrating the price of sugar on the international market. Or a possible energy blackout in the country (according to experts, there is 20% chance it will occur).

Wherever we look, there are a lot more factors which will support sugar prices and, in some cases make prices skyrocket, than there are factors which can push prices down to the lower levels we have seen recently.

The market volatility continues to grow at a hectic speed. And we have harped on this string, our readers are our witnesses, again and again. The 200-day average is 22.77%. When we look at 100 days, there is a slight high to 25.08%. For the past 40 days, 35.25%. And for the past 20 days, 43.25%. That is, the search for protection has become awfully expensive. The risk perception of violent swings has increased substantially. The market is in for a huge turnaround.

Where would you like to place your chips?