NY Sugar Futures Close Lower, Can It Get Any Worse?

Another week in which we have seen the NY sugar futures market close lower. By the way, it was the 7th consecutive week that it has done so (it began on Oct/25). The last time this occurred was in Feb/07, almost 7 years ago.

Mar/14 closed at 16.61 cents per pound, a drop of 54 points for the week, or 11.90 dollars per ton. We saw the same pressure in the months up to May/15, all falling between 30 and 50 points. The price curve is in cash and carry, typical of markets in a balanced supply and demand, with an average carry of 7.5 % per year. In other words, buyers and consumers will kick their purchases down the road. This is not valid though for the industrial consumers of the internal market, since the dollar curve is ascending, and therefore the analysis has to be done in more depth.

Several factors have contributed to this disheartening picture in the international markets, namely: a) the lack of demand in the export market; b) The funds getting tired and liquidating their longs since the week following the fire at the Santos port terminal; c) The disastrous policies of the federal government about the price formation for fuels (see more details ahead); d) The perspectives of a bigger crop in Thailand; e) Last, but not least, the real devaluation in relation to the dollar. The more intriguing aspect in the market has been the building of a long position from the funds in a moment as fragile as this one in terms of bullishness.

On Thursday, Dec 4th, NY reached the expressive negative mark of 18 sessions closing lower out of the last 20. The highest figure of sessions closing lower in a 20-day interval since December 1964, 49 years ago. When this occurred, the big hit on the musical charts was the Beatles song “I wanna hold your hand”. Today, no one it seems wants to hold the hands of this market. And even worse, if we take the last 40 sessions, 30 of them have closed lower, which has not occurred since 1971, when the popular song played then was “Brown Sugar” from the Rolling Stones, whose lyrics had nothing to do with sugar by the way.

Going back to the market, things could have been worse. Prices could have been more pressured if the mills had increased their fixation load in NY. But this does not seem to have occurred. The fixations for the 2014/15 crop this last November, according to the Archer Model, were timid and came to only one million tons, increasing the total fixation volume for the crop year to 7.6 million tons at an average price of 17.69 cents per pound, without polarization premium. We figure this should translate to 40.40 cents of reals per pound.

The market has lost a little of its stamina. We all believed that the market would be able to find a point of equilibrium as the government approved the methodology discussed at Petrobras regarding the price formation for gasoline, which would affect directly the ethanol as well. But this did not happen in the end.

Therefore, due to this lack of definition, 2014 should be a very difficult year for the sugar and ethanol sector. I am not talking here about prices specifically, since they should be better than the 2013 average in reals per ton. In this crop year, for instance, the average that we have noted to the end of November was 868.76 reals per ton FOB Santos.

Nine out of ten economists see the dollar curve for next year going up. It should offer higher values in reals per ton for exports. For example, if any company fixated their sales with the closing values of this Friday, and also hedged their currency, they would receive on average, for the 2014/15 crop (from Apr/14 to Mar/15) 100 reals above the average for this current crop year.

My worry for next year is in regards to the maintenance of the current position of the federal government towards the economy in an election year. The workers party, PT, will not spare measures in order to keep themselves in power. Even if they were to bankrupt Petrobras in the process and indirectly shrink the sugar and ethanol sector as a result. The lack of competence, commitment and responsibility from the Minister of Economy, added to Dilma’s desire to continue serving as a puppet to the puppeteer Lula, both scare any and all honest citizens of the country.

I am not a paid defender of the sugar and ethanol sector, as my words are from an ordinary citizen and stockholder of the oil state company. In any civilized nation, the president of the council of the size and magnitude that Petrobras has always had, knowing that they have had more and more losses when selling their product and yet does nothing to save it, would have been ousted by now. Not in the Brazil of the PT party unfortunately.

Here, we have seen the opposite in fact. Condemned politicians by the Justice and arrested, for instance, are still being treated well and revered, seen now as victims of a regime of exception that only exists in fact in the heads of those who have manipulated truth. The condemned scoundrels are now being treated by those in power as heroes. We live in a society with upside down ethics, well aligned with this band of disqualified individuals that have been sucking on the tits of all the taxpayers and general population for the past 12 years.

Do not forget to make your reservation for the XXI Intensive Course of Futures, Options and Derivatives, which will take place on March 25th, 26th and 27th 2014, in Sao Paulo.

Have a good week.