Sugar: A Market With No Reason To Change

Little change was once more observed in the sugar market this week. Oct/13 closed Friday at 16.45 cents per pound, increasing 16 points in relation to the week prior, or 3.50 dollars per ton. The remaining months, without exception, closed slightly up between 5 and 17 points (or 1 to almost 4 dollars per ton). Nothing new in the front, some scares to the naked bears in the calls (buying options) more out of the money, bringing more firmness to the market, pretty much like something that has been nailed to a jelly pudding.

In reality, the market has no reason to change. Nothing has been happening in the physical to justify it. It seems to be a dormant market. Summer holidays in the Northern hemisphere, with the managers of the non-indexed funds enjoying their 97,000 lots short (an estimated non-realized gain of US$ 220 million) and not worrying much. What can change? A mix of events involving the macro, weather and dollar. A recovery of prices in dollar only with the influence of one of these factors.

The fact is that one makes money with sugar even with lower prices in the international markets, which are compensated by the real devaluation in relation to the dollar and the ascending curve of futures prices. It is not a cash and carry curve, which pays for the holder to keep the product, but still it presents a good return to those who do not have liabilities in dollar and can freely operate in the futures market. By combining the NY quote of the dollar with a forward dollar contract with future financial liquidation (read: NDF) if a sugar mill wishes, providing that the usual requirements are met, it can fix its sugar sale for the 2014/15 crop for R$ 800.00 per ton on average, and 10% more to the following year. Since the average production cost of sugar as per the Archer model is at R$ 666.90 per ton ex-mill, we can see that the return in this case is good.

The sugar cane crushing figures in the Center South divulged by UNICA, accumulated to the 1st half of July, was at 223 million tons, noticeably higher than the 170 million reached last year in the same period. The market reacted immediately by dropping 25 points (almost 6 dollars per ton). There is no doubt that this harvest is way ahead of the previous one (2012/13), which began at a much slower pace and that makes it difficult for a more in-depth analysis. In relative values, in the last five years to the first half of July, it has been observed that the total accumulated of sugar cane crushed has varied from 32% to 46% of the total for the year. If we take the maximum and the minimum values of these five years, the average is 39%. If this relation is kept, the total volume of crushed sugar cane this year will reach 570 million tons, a figure below the average estimate of the market, which is 585 million tons. Using the same criteria for the sugar production, which already accumulates a volume of 11.3 million tons (above the 9.3 million in the same period last year), we would have a final production of sugar at 32 million tons. For ethanol, which already produced 9.4 billion liters, we would get to a production of 25.4 billion liters.

The average of the sugar price in reals this year, considering the value ex-mill is at exact R$ 703.00 per ton. We considered for this calculation the closing of NY, the dollar quote by the Central Bank, the polarization premium and the freight and elevation at the port. The minimum for the year has been R$ 656.54 per ton and the maximum has been R$ 797.30. Based on these extremes, according to the dollar close of this Friday, we can in theory say that the floor of the market is 15.30 cents per pound and the ceiling 18.00 cents per pound. A year ago this amount was at R$ 913.93 per ton.

The fuels consumption in Brazil had a record volume in the 12-month accumulated for the year to May/13. According to the data from the ANP, in 12 months from Jun/12 to May/13 the total consumption was 50.07 billion liters (40.28 of C gasoline and 9.79 of ethanol hydrated). The consumption increased 6.30% in 12 months. In absolute values, the consumption increase was 2.97 billion liters. We have said several times in this commentary that on a yearly basis Brazil needs to have at least 35 million tons of incremental production to attend only to the marginal consumption of fuels. The alternate to this would be the import of corn ethanol or gasoline.

Since December of 2012, Oct/13 already dropped 18%. On that date, all the months along the curve, which went then to Jul/15, closed the year above the 20 cents. Corn has dropped 29.5 5 this year, wheat 16.4% followed by sugar (in the case, the first month traded) with 15.6%.