Sugar Mills Have Been Dealing With A Difficult Year

This has been a particularly difficult year for the mills and trading companies. The low Sugar demand on the foreign market has taken a toll on the mills, what with the heavy service of the huge debt (about R$100 per ton of sugar) and the freeze on gas price which distorts ethanol price. The trading companies, on the other hand, have not made money out of the sugar business.  For instance, the collapse of premiums traded on the export market turns into loss straight into their veins. Now think about the contracts made some time ago and which now have small 5-10 point discounts vis-à-vis those traded on the spot market, which have reached 75 points. Even if it were a back-to-back operation, the final buyer would taste blood, feeling aggrieved and putting the speed of stock replacement at risk. Based on this scenario, fewer trading companies are willing to keep the machine running and demand declines even further. We all knew the difficulty the year would bring upon us, but we just didn’t expect it to be that big. 
 
New York closed the week pressuring October/2014, which closed this Friday at 15.92 cents per pound – an accumulated 22-point drop (4.85 dollar per ton) in the week. The other months until July/2017 remained basically unchanged or had a small 1-2 dollar per ton negative variation. The economic situation in Thailand, whose GDP for the quarter dropped 8.2%, strengthens the pressure that sugar availability in that country has on the foreign market. The October/March spread embeds more than 30% of cost and annualized carry.
 
Over the week, October/2014 traded at 15.82 cents per pound – the lowest price since February 14th. The dollar was at 2.3838 reais then. This year, the lowest quotation in NY in reais per ton was R$816.87, while Friday’s closing was R$826.79. We are close to the ground: a 20-point drop puts us at the lowest point in the year.
 
As we said on this weekly comment some time ago, there is some similarity between what is happening to sugar now to May 2010. Back then, it was impossible to find a bull on the market. The return on export sugar was more than 10% negative, that is, it didn’t pay for production cost at the mill. It was below the value of hydrous and anhydrous. NY even hit 13 cents per pound in early May/2010. It had lost 479 points (over 105 dollars per ton) in relation to the earlier 20 sessions, recovering all the loss at the next 36 sessions until it reached over 36 cents per pound. Whether or not we will have that happen again, nobody knows. But meanwhile, we will still lag behind for some time.
 
Due to the sad and premature death of presidential candidate Eduardo Campos in a plane crash in Santos, the possibility of a run-off for the elections increases. The market assessed this possibility and the Petrobrás shares traded at an 8% high on Friday. Elections will be held in October when March/2015 is the month of negotiation at the NY Exchange. The probable fuel price alignment with oil on the foreign market opens up a better perspective of pay for ethanol for the next harvest and naturally decreases the availability of sugar for exportation.
 
A major sugarcane producer in Ribeirão Preto has commented that his loss of production this year is over 16%. And he has always taken such good care of his sugarcane crop. Others were surprised at the relatively high number that UNICA has estimated for this year’s harvest - let’s wait and see what will happen.
 
The non-indexed funds were about 54,500 lots short last week and took advantage of the resurgence of the sugar physical market to add more sales to their position. Now almost 67,000 lots are short.
 
Jairo Menesis Balbo is one of the few mill owners who have spoken out against the predatory policy sponsored by Dilma: “What kind of market is this where the president uses a pen where there is interest to get votes?”  That’s not how it shouldbe in any serious country, but inthe country of the Workers Party (PT) and its clique, those who produce get very little value. It is widely known that Dilma dislikes the sector. Since when is the President of the Republic supposed to like or dislike this or that sector? She should go into therapy to work out her existential problems. As president, she has the obligation to work towards the economic growth of the country. What she has done to the sector is to order the casket for it to be buried in because this is how the comic opera, where she and Mantega are the leading actors and where they stifle the sector through a freeze on gas price, will end.
 
Archer has started registrations for the 22nd Intensive Course on Futures, Options and Derivatives, which will be held on September 23, 24 and 25 in São Paulo. For further information, log on to our site www.archerconsulting.com.br