Tug Of War In The Sugar Market

The sugar market in NY closed Friday’s session at a significant high – 41 points for May/2015 and 40 points for July/2015, quoted at 13.24 and 13.18 cents per pound, respectively. May/2015 is inverted in relation to July/2015 at the start of the crushing in the Center-South, when theoretically more sugar would be available for the market, shows the perception that there’s more to that story. Holders of short positions had to buy them back strengthening the spread for May/July. The largest demand for ethanol this first quarter of the year makes the mills prioritize ethanol production and decrease sugar availability, whose return is smaller. The export market reacts by strengthening the spread. Will it persist? That depends. A lot is said about the huge sugar delivery in NY against May/2015 which will take place on April 30. So, let’s see how the market will behave until then.

The funds covered about 26,000 out of more than 110,000 contracts which were short sold. They must have pocketed somewhere around US$100 million. That’s a significant coverage volume taking into consideration that the market went up less than 100 points. In order to create a panic which encouraged funds to settle their positions, the market would have to go beyond the May/2015-based 14 cents per pound, at least. There is nothing on the horizon for that.

CONAB released the estimate for the sugarcane harvest in the Center-South as being 592.7 million tons, with a production of 33.7 million tons of sugar and 26.9 billion liters of ethanol - an extremely bearish number. Archer’s estimate released in February is 573.7 million tons of sugar, divided between 32.2 million tons of sugar and 26.3 billion liters of ethanol. News coming in from India point that country should produce 27 million tons of sugar in the 2015/2016 harvest which starts in October, which is not good at all for the market.

In a recent report released by the Ministry of Mines and Energy (MME), the government estimates that the Otto Cycle fuel consumption in 2023 will be 85 billion liters. The number is lower than that in the Archer’s 2014 study, which pointed to an estimated consumption of 90 billion liters. Maybe MME is more conservative so it won’t show the real size of the hole in the sector. According to MME, in 2023 the supply of ethanol will be 30 billion liters, practically unchanged taking into consideration today’s number, since the investment in the sector is close to zero. MME also estimates that the supply of national gas will be stuck at 29 billion liters. Therefore, it seems the demand for 85 billion as they have released and the domestic supply of ethanol and gas put together is 59 billion liters – that’s a supply deficit of 26 billion liters. Where will they come from? From the domestic production of ethanol (more investments needed) or from the import of corn ethanol and/or gas?

To us at Archer, the potential internal demand for gas A, in 2023, will be 48.4 billion and for ethanol 41.8 billion liters. The size of the hole, using the supply published by MME, is 31 billion liters which, in our calculation, represents 19 billion liters of gas and 12 billion of ethanol.

Friday’s market closing points that the sugar in NY converted into real reached a little over 925 reais per ton. The following maturity months, July and October 2015, closed at R$918 and R$942 per ton respectively at current value taking off the cost of money. Based on internal ethanol movements and the perception of improvement on internal fuel demand, we believe that sugar can trade close to R$970 per ton during the second semester of the year. Should the dollar go back to 2.9000, today this represents October/2015 trading in NY at 14.75 cents per pound; should the dollar trade at 3.2000, it means NY is at 13.25 cents per pound.


Two strong currents on this market: people who believe it will break the 11 cents per pound and that it still hasn’t traded its lows; that things will get worse before they get better and those who believe that the lows have already been seen and that the market can go up. On one hand, those who believe Thailand will throw a great amount of sugar on the market, regardless its high production cost and that, anticipating the entry of European sugar in the world starting in 2017, everything will be a chaos. On the other hand, those who look at the lack of investments in the sector of the most important producer of sugar in the world, whose internal fuel market continues demanding an amount of sugarcane, that production won’t be able to supply unless it pulls more sugar out of the system. It is a tug of war.


Have a nice week everybody.