Sugar: Have We Seen The Lows?

The sugar market had a week with lower prices throughout apparently motivated by the smoothness that Copersucar has shown in dealing with the problems arising after the fire in their warehouse at Santos port, demonstrating that any eventual logistical bottleneck will be dealt with. Added to that we have the surprising long position of the funds. The CFTC had delayed the publication of its commitment report, that shows who is long and who is short, due to the US government shutdown, so the market was guessing the latest figures. We saw prices dropping drastically from levels seen two weeks ago, at 20.16 cents per pound, diving almost 200 points or 45 dollars per ton.

The week therefore closed lower between 33 and 78 points, or 7 to 17 dollars per ton. Mar/14 closed Friday quoted at 18.25 cents per pound.

The good thing regarding the situation itself is that normally in the first quarter of the year sugar shipments diminish considerably. In the last 10 years, the first 3 months have accounted on average for only 17% of the annual shipments. In other words, it is a period of shipments 35% lower than the average of the remaining months. However, we cannot forget that at least 8 million tons have been withdrawn from the market. They will have to flow one way or the other and not without an impact on premiums and freight and elevator costs. Whoever thinks the opposite is naïve.

Those who had access to the Copersucar terminal after the fire say that there will be a few months until all the sugar that was there is taken out and at least 8 to 12 months for the terminal to be working again. There is no way to confirm this. The market is not asking if but when this will affect the premiums.

Despite the bearish tone last few days, as we have mentioned here before, we have already seen the lows. The 15.93 cents per pound was the low of the last 42 months and it should remain this way. I always like to note how much the market has been trading at in reals per ton. There is certainly a big resistance around 980 to 1000 reals per ton FOB Santos, along the NY price curve and the dollar prices of the same curve via NDF operations. At these levels, many mills are encouraged to fix their contracts of export sales. Let us remember here that according to the Archer Consulting model, the production cost for sugar is currently around 700 reals per ton ex-mill.

The internal sugar market has appreciated 2.5% since the fire at the Santos port compared to the export market that has dropped to 18.25 cents from the 19.00 cents per pound level since. The spread between the two markets is 6.75%.

There are many people still believing that the Center-South will end the current crop year with a total crushing of 590 million tons. The Archer Consulting number, from two months ago, is 578 million tons.

We are beginning to see forecasts of how much we will grow next year. Although it is early still, few believe in an expansion greater than 5% in relation to this crop. In other words, we are talking about around 610 million tons of sugar cane. AS we have said here repeatedly, Brazil needs to grow 25 million tons of sugar cane only to attend the potential consumption of ethanol due to the vehicles fleet increase.

If Petrobras really implements the policy of fuel prices adjustments based on a formula that accounts for the variations of the international markets, this will be an extremely important step towards the much needed investments for the sector. The more transparent this formula is (we do not know anything about it yet) the greater the chance of us having financial instruments available to the sector in order to hedge the hydrated ethanol, a product that in 42% of the time over the last five years, has been trading at below production costs.

A correction. In last week’s commentary, we said that the other warehouse that caught fire in Sao Paulo state belonged to EDF Man. In reality, it belongs to Agrovias, of which EDF Man owns some shares.

Bloomberg is making available to its clients both commentaries – sugar and coffee – from Archer Consulting. You will have to key in ARCO.

Have a good week.