Sugar Keeps Bearish Tone, But Funds Buy

The sugar futures market in NY closed the week at a 53-point low against last week, with July/2015 being quoted at 12.89 cents per pound (a fall close to 12 dollars per ton) on Friday. All maturity months up until March 2018 closed at a steep fall which ranged between 8 to 13 dollars per ton in the week. And it wasn’t compensated for by the devaluation of the real. The value of the sugar in NY taking into account the closing for July/2015 and the dollar by the Central Bank was R$884 per ton. Both anhydrous ethanol and hydrous ethanol are above that value. Export sugar is the worst return for the mills today.

I can’t remember having participated in a Sugar Dinner in New York recently with such a small Brazilian audience and where the moods were so pessimistic. The bearish tone among the attendees was clear and, as it almost always happens in similar situations, a lot of people end up becoming bearish at the bottom – frequently reaching the limit boarding on the irrational. For example, I heard a lot of sober people speculating that the futures sugar contract in NY could reach eight cents per pound. For that to be possible, the dollar would have to trade at 5.2800 or a 70%-devaluation. Even so, the internal gas price would have to follow the devaluation of the real and the ethanol would gain market via parity, withdrawing sugarcane to produce sugar causing bullish effects in NY; in other words, nonsense.

Actually, at the events that went on in the Big Apple (NASDAQ:AAPL) during the sugar week, we hear a bit of everything - from the president of a big investment bank painting so rosy a picture of the Brazilian economy that a lot of people felt like he was talking about another country to the representative of a producing country in Central America, at another event, complaining about the “outrageous prices imposed by the foreign market” apparently forgetting that sugar is a commodity and has this weird habit of being ruled by the supply and demand law. Anyway, there were speeches for every taste.

Not only to my surprise but also to a lot of the traders’ from all over the world who were gathered here, we didn’t get to hear a whole lot about ethanol in Brazil. There is an evident worsening of the situation ahead of us as to how fuel demand will be addressed. Weaker real and stable oil should make Petrobras readjust fuel prices again evening them up with the foreign market. At least that’s the policy the company implicitly intends to adopt, putting a stop to the known problems of tight cash flow. There is the inflationary factor which can delay this process or even affect the popularity of President Dilma which couldn’t be more unfavorable.

On the other hand, as an executive from the fuel sector has pointed out, the ethanol logistics is tight due to the extraordinary current demand, so much so that the truck departs today to serve the gas station tomorrow. When this scenario will affect the price curve is the million-dollar question. The fact is that this situation is likely to affect prices because of anticipated purchases. Besides, the consumer is beginning to realize that the parity is favorable to the ethanol and is changing his preference.

Changing the subject a little, the strategy of the big Asian trading company which got 1.9 million tons of sugar at the maturity of May futures contract doesn’t seem to be working. Firstly, it was the fast nomination of the vessels which - if that was meant to catch possible short-sold sellers – didn’t have any effect or even move premiums on the spot market. Secondly, based on the rumors heard this week that some of these vessels scheduled to arrive in Santos/Paranagua were still on the other side of the planet and given the anemia of the foreign market as a whole, nobody understands why rush so much to nominate.

I believe the strategy of the trading company in question is a low cost option since there is the possibility of delivering sugar back at the next maturities if everything goes wrong, or, conversely, an eventual shift on the market which can drive up prices and premiums.

It sounds unbelievable but it’s true. This is for you who are complaining about the market - things are so dire for the sector that an executive from northeastern Brazil left his hometown to attend the annual sugar dinner in NY and, in order to save on his trip expenses, flew to São Paulo and took a connecting flight to Brasilia which took him to Dallas. Then he flew on to Atlanta and finally NY. A 37-hour long trip which saved his company a couple of sugar tons. It hasn’t been easy for anyone.

This week’s good news is that for the first time since mid-2014, the funds have been purchased. And after that, the market fell 60-70 points. What a phase we’ve been going through, huh?