Sugar: What Was And Will Be

As predicted, the week ended up fulfilling what had been promised. The sugar market in NY dropped on average 50 points in all months (between 11 and 12 dollars per ton) due to the real currency devaluation, but only after having recovered from a drop that reached 100 points during the week, in relation to the previous one.

Some encouraging news helped the session on Friday. We had rumors of a possible change in the price of gasoline (talk of a 6% increase), which is even further behind due to the real devaluation, the Brazilian central bank announcing the intervention in the real exchange market along this semester and China buying sugar in the international market. These factors ended up helping NY close the week at 16.47 cents per pound for Oct/13

China aside, in general, deals in the physical sugar market continue at a slow pace both in exports and in the internal market. There is a mismatch between the values being traded in each market. The arbitrage favors the exports in relation to the internal market by a large margin. Better return in exports may encourage the migration of sugar from the internal market to exports up to the point that the domestic drying up and the offer of FOB sugar converge. Translating it, domestic ESALQ sugar is cheap. Buyers and industrial consumers of sugar for the internal market should be attentive to that.

Whoever took advantage of the dollar appreciation must be really happy now. Several companies were able to use this favorable situation and fixed NY and the dollar along the curve in the last few sessions. The sugar futures market in NY closed Friday quoted at an equivalent R$ 889/ton FOB Santos, a drop of R$ 40/ton in the week. The average for the year as per the closing of the first traded month in NY converted in tons and adding the polarization premium, as per the closing of the dollar of the central bank, is R$ 836/ton.

As it always occurs in situations like this, when one has the feeling of not having been able to take advantage of the market situation (and exchange rates specially), the tendency is for us to see a continuous drop of the dollar this coming week or a recovery in NY if more futures selling is anticipated, to take advantage of the ascending dollar that reverted the drop on Friday. We have all indications for an upcoming week of volatility.

The ascending quotes for sugar along the price curve in NY and the equally ascending dollar curve affected by the difference between internal and external interest rated, both present an average price for the 2014/15 crop (assuming there is liquidity in both markets) of R$ 41.71 per bag ex-mill, with an average return of 24.5% over production costs which are at R$ 33.50 per bag ex-mill, according to our model. In other words, there is no reason to complain, especially those mills that are extremely efficient and have low production costs at around $ 30.00 per bag.

Small Details
The energy dept in the USA, equivalent to our Brazilian ministry of mines and energy, has as its new head as approved by the American senate, the nuclear physicist Ernest Moniz, a professor at the MIT, with several years of dedication and scientific research in his field. Here in Brazil, the heads of the ministries, any one of them, are generally politicians appointed by the parties (any one of them), usually without any knowledge of the subject matter they head nor any commitment to the area they supposedly lead. They are there to occupy positions of importance and take advantage of the power bestowed to them to do what we have grown accustomed to see.

The transparency and clarity of the American policy, even with the revolution and all doubts regarding the shale gas in the energy matrix in that country (and globally as well), which are attracting large investments (upwards of 100 billion dollars) to that sector and generating lots of jobs. In Brazil, the lack of knowledge and absence of any commitment from Dilma’s presidency added to the lack of technical knowledge of her staff plus the spurious interference by the ex-president Lula, have achieved the feat of destroying Petrobras, a company that has always been a global reference in its field, leaving the sugar and ethanol sector without any perspective of investments as well due to a lack of transparency. Our brothers from North America have a physicist and specialist at the helm. We have Edison Lobao. Need I say more? These things make an enormous difference.

Have a good week.