Sugar Drops 45 Points

The futures sugar market in NY closed this week at 16.83 cents per pound, a 45-point drop, or 10 dollars per ton. The drop extended up until May 2015, between 4 and 9 dollars per ton. A slight appreciation has been seen on maturities starting at the 2015/2016 harvest, coinciding with the period when the world will have a sugar deficit.

The week, on the whole, despite the 10-dollar drop per ton, has been calm with a few business deals made on the export physical market. The extremely competitive level of premium at which Thai sugar is being traded makes it difficult for trading companies to buy sugar from the Center South with discounts lower than 40 points. Not to mention, obviously, that this harvest has been particularly bad for the trading companies when it comes to basis.

On the futures market, however, the May 2014 maturity started to negotiate at 16.69 cents per pound, repeating the lower quotations negotiated on March 2014 right before the expiry of the contract. On the other hand, the traded volume this week was very small, one of the smallest of the year. The drop might have been caused by technical reasons unrelated to the fundamentals, since the funds, this week, even with the market fall, increased its long positions to 90,000 contracts (4.57 million tons of sugar). Their take seems to be very constructive.

In the weekly comment “A Bull in Waiting”, in early February, that is, about just six weeks ago, while the sugar market in NY closed at 15.73 cents per pound, we said that the lack of rain back then “could be just the onset of a price turnaround”. We went on to say that “the first and most important indicator of this possibility (price turnaround) was the meaningful high of the implicit volatility of options. Traders are paying increasingly more for the options”. And we wrapped it up by saying “we could see prices on the sugar market in NY go up at least to the arbitrage threshold with hydrous ethanol, which is on average 250 points above the VHP level, NY at 18.50 cents per pound before May 1st”. Well, the rest is history. The market went up to 18.47 cents per pound, while volatility increased more than 25%.

We absolutely do not expect applause, congratulations and back-tapping nor do we expect the recognition of our consulting work by repeating the predictions that proved to be true. We just want to show that many times the signs are out there and we don’t see them. The difficult job that corporate life imposes on today’s executives, bending over backwards every day, a lot of times distorts the view of those who are in the middle of the buzz.

We believe the high cycle hasn’t come to an end and the factors which brought the market close to 18.50 cents per pound still hang over our heads. The weakness of the physical market sets the tone and must make the market try out the 16 cents per pound. We shouldn’t forget the market trades close to R$900 per pound on FOB equivalent, which is still above the R$882/pound year’s average and far from the R$817 low. The dollar at 2.3230 on Friday supports NY (hypothetically) at 15.33 cents per pound!

The sugar production cost estimated by the Archer Consulting model shows R$35.3555 per bag, at the plant, without financial cost. Now the production costs for anhydrous and hydrous ethanol in Reais per liter at the plant are 1.1526 and 1.11065, respectively.

Anhydrous still has the best profitability and many plants have moved up the milling for the 2014/2015 harvest in order to try and catch a ride on the profitable prices. The window for ethanol export for May/June/July is also wide open and prediction has it that we will export up to 2 billion liters this year.

The last MB Associados projections show a PIB growth for 2014 by 1.6%, IGPM by 6.9%, SELIC by 11.50% and exchange rate by 2.45%.

Dilma’s lack of skill in the highly suspicious episode, while she was the president of the Board of the Company, when in 2006 Petrobras paid US$1.380 billion for the Pasadena Refinery in Texas, the same one the Belgians had bought years earlier for US$43 million and whose market value today is US$118 million is appalling, to say the least. Dilma has a privileged brain and should give it away to science. As for ethics and shame, she will have to borrow those.

An important detail: the seven people who are on the Board make on average R$176,000 a month each.