Sugar's Illusory High

The NY futures market ended the week higher 45 points for Oct/13, which closed at 16.79 cents per pound. The remaining months also closed higher, varying between 34 and 42 points higher, or 7.50 to 9.00 dollars per ton. This was an illusory high, by the way, since it was “erased” by the real currency appreciation. Therefore, if we compare the closing of the week in reals in relation to the previous one, we see that the market closed in fact lower R$7 per ton.

The dollar closed Friday lower quoted at close to R$ 2.3000, its lowest level since August 12th. With a weaker dollar, there is no doubt that Dilma and her crew will postpone the needed increase on gasoline prices while Petrobras continues bleeding. As a palliative, the BNDES approved the financing of R$ 1 billion for ethanol stockpiling, aiming at diminishing the price oscillations of that fuel during the off-season. This should have been done in 2009 already but it was only approved now.

In the macro scenario, there is something that may affect the sugar market. Data about jobs creation in the USA and the revision from the previous month show that the US recovery is not as good as previously thought. This way, according to some economists, it could be that the dollar may have reached the ceiling, which may cause a correction in the price of commodities. In general terms, the commodities went up during the week, with cocoa at 5%, sugar 2.8%, oil 2.4% and coffee 1%.

Besides the more pronounced devaluation of the real currency, which began at the end of last May, sugar for exports had a negative return in relation to the production costs of 9% on average, while the anhydrous experienced a gain over production costs of 8.4% on average and the hydrated, although with a loss, was still better than sugar for exports, at negative 5.2% return. The bet at the time was that the crop would be more geared towards ethanol. In August, the average rate for the real currency was 2.3457, 15% above the average rate for May, which was 2.0381. With that, sugar for exports was able to obtain an average positive return of 6.2%, while anhydrous fell to 2.7% and the hydrated worsened slightly to a negative return of 5.6%. The result is that the mills reverted to prioritizing sugar production. In any case, on the average return for the crop year, anhydrous has been the better return compared to the other products. Evidently this is a linear calculation and it does not reflect what may have actually happened at the mills.

Archer has divulged to its clients at the beginning of this month its 5th estimate for the 2013/14 crop. The production was kept at 578,000,000 tons of sugar for the Center-South, converted to 33.130 million tons of sugar and 24.505 billion liters of ethanol. Although the number for sugar cane did not change, due to a lesser ATR verified, we reduced the sugar production by 523 thousand tons and the ethanol one by 187 million liters.
These changes on the mix, dollar rates and lesser ATR estimated, all made that the Archer model recalculate the production costs in the Center-South, putting it to R4 34.7006 per bag ex-mill, increasing the FOB Santos cost to 15.47 cents per pound, an increase in reals of a little over 3.5%.

The ANP has divulged the figures for fuels consumption in Brazil for Jul/13. We had 890.5 million liters of ethanol consumed and 3,462 billion liters of gasoline C (which contains anhydrous ethanol). The accumulated for 12 months has reached a new record for the 3rd month in a row, at 50.58 billion liters.

The futures market for hydrated ethanol at the BM&F Bovespa shows an open position of 3.931 contracts, a pitiful volume in regards to the hedging needs of the industry. The negotiated prices show a negative return same as the physical market of that fuel. The volume of contracts traded on a daily basis does not represent not even 10% of the daily consumption for this fuel. Without the government interference and a predisposition towards the liberalization of the market, we would see the BM&F Bovespa multiply by 10 the current volume in the blinking of an eye. This will only occur though when we find intelligent life at the government.

There are only three remaining openings for the XX Intensive course of Futures, Options and Derivatives – Agricultural Commodities, which will take place in Sao Paulo, on Sept. 24, 25 and 26. In its 19 previous editions, more than 500 professionals from different areas and distinct commodities have attended this course. This is your chance to participate.

Have a good week.