The futures sugar market in NY behaves like an endless rerun of a horror movie. This time around, the week closed Friday with October 2015 nailing 11.14 cents per pound, accumulating a devaluation of two to ten dollars per ton in the week, worse for maturities which must have been pressured by the real devaluation which, along with the Brazilian interest rate of 14.25%, makes the long-term operations in real more appealing for those who can make the hedge. Depending on the maturity, the values in real per ton for the 2016/2017 harvest are around R$1.100.
Comparing with the closing of the last working day of 2014, sugar already accumulates a 75-dollar fall per ton in the first maturity month (R$12.74 per 50-Kg bag) this year. Other commodities also had this huge a loss, among them coffee (a 28% fall), oil (17%) and wheat (16%).
Prices in real per ton, however, are still above the lowest value seen last September. To break this negative record, considering the dollar at 3.4000 reais, for example, we can say that the lowest NY could trade at is 9.50 cents per pound, the lowest in seven years. The funds themselves – despite the unfavorable world macroeconomic scenario in relation to commodities – should have a consensual level which will push them to cover short positions in the exchange and make a profit.
The correlation between NY sugar quotation in cents per pound and the exchange rate shows that over the last 20 sessions the real devaluation accounts for 69% of the fall of the commodity in the exchange. Over the last 50 sessions, the importance of the exchange rate fell to 44% and over the last 100 days it was 57%. On the other hand, if we make the correlation of the daily settlement of sugar in real per ton with NY sugar quotation in cents per pound, we will see it is 81%, that is, the value in real per ton is less volatile and is influenced by only 10% of the exchange rate – an increase in the exchange rate by one point percent means a 0.1 percentage point fall only in price in real.
And what’s your take on the Asian trading operation receiving a huge amount of sugar in the exchange? Will it be successful? This is the question everyone is asking. I think if it goes wrong, they will deliver back the unsold balance in October. I don’t believe this will happen, though. I tend to think there will be a double bet. The commodity market has these peculiarities. Like in poker, sometimes are aces, sometimes are faces, and sometimes are twos and threes. The “flop” may not have been favorable so far, but there is still a chance the “turn” and the “river” will change the game around. What if another pair of twos is dealt to make a four of a kind! Chips, please!
The model developed by Archer Consulting shows that last June 30 the mills were fixed at the total of 64.21% of their export sales for 2015/2016. The average fixation value achieved by the mills, according to the model, is 15.14 cents per pound. This value is equivalent to R$948.76 Santos FOB. The average dollar achieved by the mills over this period of fixation was 2.7323. We might have less pressure than what we expected since the fixed volume so far is pretty robust for the time (see graph).
Up until the first two weeks of July, the sugarcane production in the Centers-South reached 230 million tons with an average ATR of 122.48 kg per ton of sugarcane. Maybe the market still hasn’t realized it, but to produce the same amount of ATR we produced last year (78.2 million tons of ATR), the Center-South will have to have a yield starting now of at least 142.27 kg per ATR to reach the same last year’s production (assuming we will crush 581 million tons of sugarcane, according to Archer). Such yield was seen in 2013/2014 over two weeks in September and October - we will adjust our harvest forecast downward.
Seneca, one of the most famous lawyers, writers and intellectuals of the Roman Empire, wrote “The Gourdification of the Divine Claudius” attacking the Roman Emperor, pointing out his vices, inability to rule and his most controversial political positions besides his faulty character. Seneca is to have written the scathing text, after Claudius’ death, probably in response to the exile imposed by the Emperor because of the writer’s affair with the Emperor’s niece. In it, Seneca describes Claudius climbing up Mount Olympus after his death in the hopes of turning into a divinity, but the Senate of the Gods decides not to deify him due to his conduct on Earth, and after being passed around, Claudius ends up in Hades (hell) performing a minor function. This is Claudius’ frustration – he was hoping for the apotheosis (becoming God) but ended up facing the gourdification (becoming a pumpkin). The meaning here would be becoming a “pushover”. Interestingly enough, history repeats itself. Two thousand years later, we are watching Dilma’s gourdification.
Have a nice week everybody.