The Sugar market in NY closed the week at a 46-point drop for July/2014 reflecting the chronic lack of demand, which annuls – at least temporarily – the idea that the international prices will recover and considers the lower crushing in the Central-South. July/2014 closed Friday at 16.92 cents per pound. All the other months closed in the red showing falls between 2 and 10 dollars per ton.
What is striking are the spreads traded in NY – mainly July/October and October/March which carry an annualized discount of 20.13% and 17.79%, respectively. Many times when we had seen such a discount, the market ended up reacting dramatically narrowing the difference to compatible levels with average market financial cost and storage expenses. Eighty points of discount between July and October is inviting and encourage the end consumers to start buying. After all, sugar for October is 18 dollars per ton more expensive than the sugar for July. Taking for granted that the consumer can advance receipt, has storage conditions and – mainly – cash flow, he would count on 18 dollars per ton to pay for storage and a 3-month financial cost!!! If he does not advance it is because the demand on his side is also discouraging. For the trading companies, as long as it is possible to relocate purchases and combine takings and deliveries in the books, the game can be profitable.
The sugar market has to deal with two contradictory contexts. One is the current immutable agony of negotiating sugar for exporting, whose volumes shrink and happen at a snail’s pace under the indifferent look of buyers. The other is the beautiful life of better prices for the second semester, for reasons already discussed here over the past weeks. When the market lacks bullish winds, any cold can turn into pneumonia. UNICA releases a crushing number of 39 million tons, 4 million over the same period last year, with little overall change, but the bear market blows the news out of proportion and what we have seen is July/2014 fall over the last six weeks.
Ethanol overseas has also helped. Chicago’s ethanol contract has melted following corn which just over the last 30 days devalued by 12%. Real has also contributed to pressure NY. NY value in reais per ton FOB Santos fell to R$871.35 – too low if we look at the perspectives for the next months (milling, El Niño, etc) and – mainly – seeing that the yearly average is R$885.39 and the average fixations of the mills is R$925.59 per ton FOB.
The National Agency of Petroleum has disclosed the monthly consumption in April 2014. It was the second largest consumption volume in history, losing only to December/2013. In April, 4,726 billion liters were consumed - 1,902 billion liters of ethanol and 2,824 billion liters of gas A (no blending). The accumulated over 12 months reached a record of 53,897 billion liters, a yearly growth of 8.40%. This increase was practically in ethanol, that is, 4,177 billion additional liters of the product consumed over this 12-month period. Today, ethanol represents 40.8% of the consumed fuel in the country (Otto Cycle). This percentage was at 35.7% a year ago.
Something curious about the futures sugar market in NY: in 2010, the number of sessions whose daily fluctuation exceeded 2% (plus or minus) was 135. Undoubtedly a year filled with great fluctuations. In 2011, this number dropped to just 96 sessions. In 2012, even fewer fluctuations: 51. Last year, the market had only 17 sessions with fluctuations greater than 2%, so watching a domino game on TV was way more exciting. So far this year, we have had 22 sessions already.
The model developed by Archer Consulting has found out that until May 31, 16.2 million tons of sugar from the 2014/2015 harvest were fixed by the mills (about 60% of the estimated volume of exports by Brazil). The average value of fixations is 17.52 cents per pound, without the polarization premium. The model also informs that the average value of fixation in reais per pound, without polarization premium, is 40.35. The average exchange rate obtained by the mills over this period is 2.3036. This percentage is inferior to that of the last two years when we saw 70% fixed in 2012/2013 and 67% in 2013/2014. Two things might be encouraging this “delay”: smaller window for fixation due to credit restrictions, that is, the trading companies only allow fixing closer to shipment so they won’t take a chance on defaulting, and with greater magnitude the fact that the mills are waiting on the market to record the perception of less crushing of sugarcane and less availability of sugar. Let’s wait and see.
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.