Sugar Closes The Week Almost Unchanged

The Sugar market in NY closed practically with no changes this week. The variations that occurred in the months with longer maturities were very small. Nothing new happened on the export market, which continues with little demand. Some news about a decrease in the sugarcane harvest in the Central-South popped up, but they were regarded with suspicion by the market. Apart from that, the short week due to the holiday on Monday in the United States had little to report on other than the fact that during the week July traded at 16.95 cents per pound and then recovered. Since sugar is “late” compared to the vigorous reaction of the other commodities, it is possible the funds will keep their long positions which have an average input price of 17.14 cents per pound, according to Futures Analysis.

Since the 2008/2009 harvest, when the sugarcane production in the Central-South exceeded 500 million tons (504,963 tons, to be more accurate), the sector has been stagnant. Using the last prediction by Archer Consulting for the 2014/2015 harvest, from 575.5 million tons (coincidentally the same average number obtained from the data collected by Thompson Reuters among the participants of the “Perspectives of the Agribusiness” Seminar, sponsored by BM&F Bovespa last Thursday in Sao Paulo), what we have seen over the last 6 years is a tiny 2.7% growth a year.

Compare this growth, for example, with the increase in Brazilian exports over the same period of time, which jumped from 20.8 million tons in 2008/2009 to approximately 27 million tons last harvest. A 5.4% increase a year. Well, if sugarcane increased less and exports increased two and a half times as much, it is obvious more sugarcane was set to sugar production because over this period it resulted in better returns for the mills.

But look at the main aspect which is the consumption of fuel in Brazil. It was 39 billion liters in the 2008/2009 harvest and ended the 2013/2014 harvest with a consumption of 53.4 billion liters. In five years we grew by a yearly average rate of 6.49%. It would be a comfortable situation if this fuel growth could have happened with ethanol. We went from a 51.9% participation of ethanol in the Otto cycle to 40.4%. We lost the equivalent today to an additional participation of about 6 billion liters a year. That is, in a simple calculation we could say that the sugarcane harvest in the Central-South today could be without major mishaps 650 million tons had we kept that initial parity.

This same participation of ethanol, at the end of the 2008/2009 harvest, reaching 51.9% would have been even larger at the beginning of the next harvest, when it reached 54.5%.

One of the issues I brought up last week at the discussion panel I participated in as a lecturer at the abovementioned Seminar was where we can arrive, minimally as it may be, in 2020. I used for such exercise the assumptions that Brazil continues to keep its share of participation on the sugar international market. That is, I don’t even foresee the possibility of us getting new markets. Also, for the same purpose, I assumed that the participation of flex vehicles which effectively use hydrous ethanol will stay at 32-35% (don’t forget this participation has been at 62% in the past). And, finally, we assumed that the world consumption growth for sugar will be 1.76% a year.

Based on FAO data about population growth and per capita consumption of sugar, we figured out that in 2020 the world will consume 19 million tons of sugar on top of what it consumes today, with a great part of this growth coming from Asia, improvement of population income and increase in direct and indirect consumption of the product.

So, we believe Brazil’s share in 2020 will include an additional value of 3.7 million tons over in exports, a domestic underlying consumption which will be 1.2 million tons greater than it is today and, as for ethanol, more than 11 billion liters would be required to meet the increasing fleet.

The bottom line is in 2020 we will need an additional volume of sugarcane to cater to the market (keeping in mind that we have been conservative at this task because we haven’t raised our share on the international market and have kept the size of the consuming market of ethanol via unchanged flex cars) of 182 million tons of sugarcane. This represents 36 mills capable of crushing 5 million tons. In order for these new mills to be operating in full capacity in 2020, new investments of about 30 billion dollars would have to be made starting now. Can we pull that off?

Personally, I don’t think so. The investor does not believe in this government. The image of lack of planning, legal insecurity, unclear game rules, overexposed by the World Cup event, shows the total inability this government has to manage and makes the most optimistic investors leery.

In addition, Dilma’s incompetence to deal with markets is scary. She and her antecessor managed to drag through the mud Petrobras that used to be synonymous with cutting edge. By subsidizing gas and keeping prices below those of the international market to control inflation, Dilma and her team managed to knock down on a single bid the market value of the state-owned oil company and strangle the sugar-alcohol sector.

How much does this irresponsible meltdown cost? Let’s start with the fair gas price which today should be at R$3.21 a liter and which would make it possible for the ethanol price to reach R$2.24 a liter, way far from the current R$1.80. Taking this difference and extrapolating it to the size of the Brazilian harvest, we could assert through a simple calculation that the sector has been drained out of almost R$12 billion. Now, compare this value with the debt size the mills are in, estimated at R$57 billion, and you will have an idea how much this government’s disregard and incompetence costs the sector.