Will The Sugar Market Be At 22 Cents in the Second Semester?

The US Sugar No11 closed last Friday for July/2014 at 17.91 cents per pound, a rise close to 16 dollars per ton against the previous week. The weekly closing for the other months along the curve extending until March 2017 shows there is a predisposition of the market participants to start paying more attention to the long-dated maturities due to the eventual increase of the world’s deficit.

2013 was a very difficult year for commodities, and now it looks like we will see a recovery this year. Led mainly by coffee and grains, the good humor on the commodities market has also contaminated sugar. The funds are undoubtedly pouring more money into commodities, in amounts not seen for at least 18 months. And as for sugar, they are long nothing less than 108,000 lots, a volume equivalent to almost 5.5 million tons.

Over this event-filled week in NY, people talked a lot about El Niño, turned into a mythological being to cheer up producers during lean times. There are even people betting on the day the “savior” will come. All kidding aside, both the Australian Bureau of Meteorology and the Service of Meteorology of the United States believe the chances of El Niño occurring is high. In Brazil, as far as sugarcane goes, its effect would be rains that could delay the crushing and the decrease in the sucrose level in the sugarcane. A rainy day in the Center-South represents between 2.25 and 2.5 million tons of sugarcane that are not crushed.

On the other hand, the spasms of prices that took place last week were caused by the drop in crushing in the Center-South during the second half of the harvest. They went overboard on the number as if it would stay unchanged until the end. The market needed some good news and held on to this. On the physical market, however, the buyer looks away and the buy offers continue with bitter discounts. Under dichotomous situations such as this, it is preferable to fix sales taking advantage of the sudden price increase or at least work with flexible stop orders (you change the level of stop in alignment with the market on the rise).

A reputable market executive, and according to him, an avid reader of mine while he is playing his morning golf game on Saturdays, precisely between hole 8 and 9, when my comment pops up on his iPhone, questioned me at one of the many cocktails that went on during the Sugar Week in NY, why I am so bullish. There is a difference between being bullish and constructive, based on the market fundamentals. I guess a few people doubt that the sugar market in NY is more likely to go up than down.

My arguments are the product of the ingredients we have ahead of us and make up a constructive contour for the market: a) a harvest that might reach 575-580 million, 3% smaller than last year’s; b) the limit of installed capacity in the sector close to 620-640 million tons; c) about 8% consumption increase of fuel, almost all represented by ethanol; d) gas price readjustment after the elections; e) larger ethanol production, so less available sugar; f) increase in world’s consumption of sugar a little over 2% a year; g) increasing deficit between world’s production and consumption; h) lack of new investment and the stagnation of the sector. If these combined ingredients are not enough to raise prices over the next two years, then I do not know what we would need for that to happen.

But where can the market go after all? It is easier to be bullish with the market at 16 cents per pound than at 30 cents per pound. It is still early to talk about the size of the sugarcane harvest. Although the great majority work with a number close to 575-580 million tons, it is good to remember that at this time last year a few people believed we would reach 595 million at the end. I believe that an eventual larger harvest loss in the Center-South (smaller than 570 million tons) is not reflected in prices yet, that is, we can have strong variations for October/2014.

July/2014 closed this week at R$912 per ton FOB. Over the last two years, the maximum value sugar traded at was R$1,118 per ton. And the average for these two years, according to the closing criterion of NY and the dollar closing by the Central Bank, is R$896 per ton. Does anyone doubt that based on the scenario ahead of us this maximum value in reais will be exceeded if the combination of the arguments presented above should be confirmed? If we take the maximum value reached in July 2012 divided by US$2.2200, we come to 22 cents per pound in NY – who doubts that?

End sugar consumers must look at the price curve carefully because we might have, as of the second semester of 2014, at least a couple of years with robust prices.

Dilma, with her clear ability of talking nonsense as usual, said at some appearance which is on the Internet that India has “a trillion inhabitants”, when her desperate staff corrected her. Her problems with numbers make us blush with shame. The possibility of having this person running (?) the country for another 4 years makes me want to move to another solar system.