Sugar: Difficulties And Opportunities

One more week of the real currency devaluation that directly affected the drop of sugar prices in the international market last Friday, giving back all the gains in dollars obtained up to that point. On Friday, Oct/13 sugar closed at 16.94 cents per pound, slightly lower by 4 points in relation to the prior week, basically like the remaining months which closed lower up to 7 points or 1.54 dollars per ton.

Note, however, that sugar closed in NY at an equivalent of R$929 per ton, the highest price since Dec/12. There is no doubt that an anemic real has contributed for the mills that still had sugar sold but not fixed, to take advantage of more favorable prices and place their selling orders at the futures exchange in NY. This liquidation price is R$100 per ton higher than what was being traded at a month ago when it reached R$827 (NY closing at 16.18 cents per pound times the dollar closing as per the central bank, or 2.2282 times 22.0462 to convert from cents per pound to dollars per ton, times 1.0405 that is the polarization premium). Therefore, whoever waited to fix in reals must be really happy now.

If we use the net value in reals ex-mill, Friday’s close was R$800 per ton. The production cost of sugar as per the Archer Consulting model is R$33.5020 per bag ex-mill, in other words, it is a price with positive returns.

Sugar for exports (traded with a small premium in relation to NY), anhydrous, sugar for the internal market and hydrated, this is the order for positive returns for these products. Sugar, aided by the dollar, has a positive margin of 15 % above production costs, followed by the ethanol at 11.5 %, and sugar for the internal market and hydrated. The mills with cash flow capability and a better structure can do a NDF (on the counter product offered in the market that allows the mills to fix their sugar in reals per bag) of sugar and this way hedge their production for the 2014/15 with a return near the 30 % margin above production costs. A sweet deal indeed.

The other side of the coin is that the financial markets speculate that the real may reach 2.70 by the end of the year. Dollar at this level brings the production costs on the Center South to 15.00 cents per pound FOB Santos. Fearing this, mills that still have sugar to be sold against Mar/14 can be proactive and sell the NY futures contract and wait to hedge the currency later.

This is a risky proposition but a very likely one. On the other hand, the more the real devalues the bigger is the headache for the Minister of the Economy. The oil imports bleed the cash flow of Petrobras violently and this situation will reach to a point where the government will have to change the gas prices.

The position of the non-indexed funds in the NY sugar contract, divulged this Friday, was surprising. The funds have reduced their shorts by almost 50.000 contracts while the market in the same period had a variation of only 70 points. In other words, for each point of increase that we observed in the last two Tuesdays (when the commitment reports data is gathered) the funds needed to buy more than 36.000 tons. The market was not expecting that and the tone in the opening of the market Monday may be a bearish one. What may stall the bears is that fact that the fixations are already well advanced. An optimistic trader called me at the end of the day Friday and said “is it possible the funds will revert now and begin to buy the futures?” Winston Churchill described the optimist as a person who sees an opportunity in each difficulty and a pessimist as one who sees a difficulty in every opportunity. This coming week may be an interesting one.

The 10th estimate for price fixations by the mills for the 2013/14 crop as per the Archer Consulting model is of 20.085 million tons already fixed at an average price of 17.65 cents per pound (equivalent to 404.87 dollars per ton FOB Santos). One year ago, the volume for the 2012/13 crop was 21.190 million tons, at an average price of 22.98 cents per pound. Two years ago, the volume for the 2011/12 crop was 22.517 million tons at an average price of 24.14 cents per pound. Therefore, the volume for this crop is well behind compared to the previous two crops. In relative values, the volumes fixed in the last two crops as a percentage of the final volume were 77% and 90% respectively (for 2012/13 and 2011/12).

An important correction about what has been mentioned here in the last two commentaries. Last week we said that if we projected a consumption growth for fuels in the order of 5 % per year, in the 2018/19 crop we would reach “an additional consumption of 132 billion liters of ethanol.” This is an exaggeration. The word “additional” in the text is not correct. The correct is a total accumulated consumption of the 5 crops (from 2014/15 to 2018/19) of 132 billion liters. In the week prior to the last one, we mentioned that the Center South would need 700 million tons for 2016/17 then we mentioned 720 million tons for 2018/19. The first estimate assumed a fuel consumption growth of 5 % per year. The second one was a lot more conservative. Our illustrious reader Mr. Michael McDougall, senior VP at Newedge, has noted these two corrections (thanks Mike).

There are only five spaces left for the XX Intensive Course of Futures, Options and Derivatives, Agricultural Commodities, which will take place in September, on the 24th, 25th and 26th. Hurry up to secure a place since the next one is in 2014.