Sugar, Oil & Feathers
The sugar futures market in NY went through a week of great volatility. A keener observer noticed that every time the quotations of March/2022 got close to 20 cents per pound, there was a strong wave of sales that pressured the market toward 19 cents again, where it seems to want to belong in.
The sale pressure came partly from Brazil’s fixations, but it was surely accompanied by other origins that took advantage of the good price levels to lock its profitability, “India is one of them”, as a seasoned trader put it.
Actually, as the third greatest consumer of energy of the planet, India imports more than 80% of the oil it consumes. This turbulent period in Eastern Europe has risen the country’s spending on import and highlighted its energy vulnerability, getting the country worried about a possible oil crisis. Of course, India will strive to speed up its ethanol production.
As an executive from the ethanol market said, Russia’s war has made the countries’ weakness known and has revealed the need for reordering the energy matrix in the world. Ethanol will certainly get the spotlight within this reordering process and Brazil has area and conditions to grow sustainably if there is heavy investment in the industrial park and pressing legal security for the investors. The latter is our Achilles heel.
It’s too early to say where we are headed. Oil, grains, wheat and Putin are unstable components in an equation of multiple unknowns. What seems to be consensus at least is the return of inflation worldwide, pressuring the Central Banks to increase the interest rates and leaving an open flank for stagflation (low growth, or even recession together with high interest rates).
As for the commodities specifically, the increase in oil price, which has gone up 19% over a month and in the yearly accumulated is around 45%, will cause an increase in sea freight and the makeup of the basis. That is, since the importers of commodities will pay a more expensive freight to receive the products at the destination, this additional value will have to be compensated for with the increase in the discount which, unless there is a shortage of the product, they are willing to offer the sellers.
On undersupplied markets, the importer swallows hard and pays for the freight, because if he doesn’t, he won’t have the product. But on markets where world supply and offer is balanced out – which is the case of the sugar – the sellers (mills) are the ones who end up paying the bill. However, the mills are already fixed by 76.75% for the 2022/2023 crop (see below) and – at least initially – it might seem like the buyers (trading companies, refineries, and importers) will get stuck with this cost.
There is strong evidence that the sugar market tends to move toward cost and carry, being a greater pressure on the shorter maturities and making them cheaper than the next maturities. In other words, high interest rates hinder stock building and consumption so buyers tend to postpone their purchases and sellers are forced to give greater discounts to get rid of the goods. If we thought 2022 would be easier than 2021, we’d better think again.
Speaking of mills’ fixation, we found that in February 3.25 million tons of sugar were fixed by the mills at the average price of R$2,176 per FOB Santos ton. The NY exchange traded 3.2 million sugar futures contracts during the month, 42% above the volume of the previous month and 30% above the monthly average over the last twelve months. The accumulated average value of fixation in the 2022/2023 crop is 16.90 cents per pound, without polarization premium, equivalent to R$2,178 per FOB Santos ton, or R$0.9479 per pound, both including polarization premium.
I have to comment on the mess the federal government has made. The president did his best, but he wasn’t successful. But there is no guarantee he won’t try again. Everything goes to try to get reelected and nothing is better than resort to an undoubtedly inefficient resource which has been tested out by the great majority of ignorant populists who came before him: the freeze on fuel prices. It’s a total contradiction for someone who was elected under the auspices of liberalism.
Those who are over 40 years old and have already seen this comic opera know that such expedient has never worked in Brazil without causing shortage, breakdown in the productive chain and slowdown in production and expansion of the industry affected by this abject resource in addition to bringing great legal insecurity to those considering investing here.
Every time a president chooses to use a price freeze to please sectors of the society (read voters in election year), he tells potential investors, those awful people who want to invest in new refineries, for example, “do not come put your money here, because I change the rules whenever I see fit”. And not only that, he changes the fair price of the hydrous and jeopardizes the planning of the mills that lose the reference of the product value. It’s a disaster.
During the week, we heard executives deeply irritated by the issue that – if it were put in place – the freeze could last up to three months. According to our preliminary numbers, such a disastrous action would cause the mills to lose R$4 billion in revenue, only with the hydrous. It’s worth remembering that when ethanol hit R$4.5600 per liter in October, there was some movement within the government (coming from God knows where – I’m being ironic here) to decrease the percentage of ethanol in the gas mix. The lobby against the sector is pretty efficient. And when the sector hangs its head so as not to confront the government in view of its populist adventures, it pays the bill. But it doesn’t do that alone.
The balance of the difference between the price Petrobras pays for imported fuel and the lower price it passes on to the refineries will be financed by the Treasury. And the Treasury money comes from tax payers. The Brazilian state-run oil company, because of this policy, can run the risk of getting sued again (like in Petrolão) by SEC. If the company is made to compensate (like in Petrolão) if reckless management and losses caused to shareholders are proven, guess who will pick up the bill? We will – the tax payers.
This stupid idea levels out the current president with the other postulant, the one who always treated Petrobras like a zoo, but also trips over the logical reasoning taking us to the wisdom of that other memorable president, our most foolish thinker, whose interventionist flights the current president seems to mirror. There is no greater evidence of insanity than to want to do the same thing expecting a different result. Therefore, the chief executive is another one who has made it to the list of the horde of morons who have already sat in the presidential seat. At the end, they are all birds of a feather.
To read the previous episodes of World Sugar Market – Weekly Comment, click here
To get in touch with Mr. Arnaldo, write on arnaldo@archerconsulting.com.br
