Sugar Closed The Week With 54 Point Drop

The Sugar futures sugar market in NY closed this week at a 54-point drop for July/2014 quoted at 17.37 cents per pound. Out of the 14 sessions that have been held so far in May, the market has closed at a low in 10. And Friday’s closing represented the 7th low in a row. The bears are smiling on the way to the bank. The bulls are licking their wounds.

The undisputed fact is that the market lacks news which supports international prices or which pulls the trigger on the improvement of the fundamentalist picture expected for the second half of the year. The physical market of exports is still weak and dragging itself with buying offers showing discounts up to 50 points for shipment in June from Santos. You know, harvest starting, mills needing money to cover expenses, it is just normal to see the deterioration of premiums and prices. And that’s what we are witnessing. Buyers, who are in no hurry, clam up.

In the month’s accumulated, July/2014 reached the level May/2014 was at when it expired. That is, at the tug-of-war between the much propagated low quality of the sugarcane (recurrent topic in the “rounds of whiskey” at the Sugar Dinner in NY), which means less availability of the product and, in thesis, better prices, and the bad cash flow of the mills, the latter wins. And prices drop because it is necessary to make money.

Over four weeks hydrous has plummeted 16% and anhydrous 13%. Likewise, sugar loading costs for shipment in June, with 40% discount on average, vis-à-vis the closing for March 2015 at 19.07 cents per pound embeds more than 15% a year on freight cost. The spread for July/October is a clear demonstration of the lack of appetite to buy now. The spread has increased up to 88 points and taking into account the discounts practiced on the export market, we are talking about a carry of more than 20% a year. This goes to show how much the mills need money. The trading companies only reap the harvest here and there.

Although demand is still bad, industrial consumers should get their pencils sharpened and start making calculations. However, the decrease in sugar supply does not seem to worry the consumers, at least for now. The pressure on July/2014 which has devalued 12 dollars per ton over the week is strong, while the longer maturities, though having devalued as well, have had smaller drops between 5 and 8 dollars per ton. July would only depend on the weather for it to be able to recover. That’s why we believe, as expressed here in this comment last week, that the second semester should be more positive in terms of international prices for sugar. But until then, there might be crying and teeth-gritting.

This year, the closing average in NY converted into R$ per ton by the day’s exchange rate has been at R$885.46 per ton FOB. The highest price traded in the year has been R$981.61 and the lowest has been R$816.87. It looks like some market participants aim at fixation whenever the value in reals per ton is close to R$950.

In a simplistic way, taking into consideration the values mentioned above, we can assert that, given Friday’s closings, it is a good bet to believe the support for July/2014 will be 16.00 cents per pound and there will be some strong resistance above 18.50 cents per pound. A fence at these two prices of exercise is worth about US$2.65 per ton. That’s not a bad deal.

The real appreciation against the dollar closes the gap between gas equilibrium price and the value negotiated at the pump. Based on the calculations by the Archer Consulting model the fair value based on Friday’s closing for the dollar and oil is R$3.170. That means the government will hold off on readjusting prices until after the elections in October if possible.

Archer is promoting the 1st Advanced Course on Agricultural Options, attending to requests from various agribusiness segments. It will be a 2-day course focusing exclusively on options about agricultural commodities. The course will be held on July 29 and 30 in São Paulo.