World Sugar Market – Weekly Comment – Episode 37

There’s a surprise everyday

The sugar market closed out the week with future prices at a sharp high, putting March/2022 at 19.65 cents per pound, closing at its highest. Sixteen dollars per ton was the accumulated appreciation in the week for the first maturity, while the others appreciated between 10 and 14 dollars per ton.

However, the strong recovery of the real against the dollar, reaching R$4.7430, neutralized this impact because the weekly accumulated, the close of the market in NY converted into dollar via NDF (Non-Deliverable Forward), represented a shrinking of sugar values by R$44 per ton for the 2022/2023 crop, R$57 per ton for 2023/2024 and R$54 per ton for 2024/2025.

The sugar value on the spot market today is R$2,141 per ton, R$30 below the average of the mills’ fixation for the 2022/2023 crop, which will start soon.

But if the fundamentalist situation of the sugar was pointing to a weaker market in cents per pound, why did prices go up in NY? There are some points that need to be widely discussed.

First, oil continues strong having gone up 23% since the start of the Russia invasion of Ukraine. The Bent type, for instance, closed Friday at almost 120 dollars per barrel. Based on the gas quotation on the foreign market, Petrobras would already need to adjust prices again by almost 11% so as to stay aligned with the quotation abroad.

Second, with the real appreciation, the ethanol market improved on its equivalent in dollars and, based on B3 closing, for the first maturities, it is above the equivalent value in sugar in NY by about 50 points. If we consider the premium obtained by CBIOs too, the hydrous settles something like NY plus 80 points.

Third, lots of mills start to crush in a few weeks while their agricultural managers warn that first-cut sugarcane is too low and it calls for a lot of rain as soon as possible. Some mill owners point out that the productivity for these first-cut sugarcane types might drop by 40%.

So as not to have to speak about other points, these three give the market an important warning: the mills will start crushing later and they will prioritize ethanol production (more profitable). Since more than 20 million tons of sugar must already be fixed for the 2022/2023 crop, it seems unlikely that we will have plenty of sugar at the start of the crop.

Consequently, the May/July spread gets stronger because trading houses adjust their books in case there is a smaller availability of sugar at the start of the crop. However, in our opinion, the world supply and demand are still balanced, or more precisely, equated. India has indicated it wants to export up to 8 million tons of sugar – wow! Who would have thought it, right? At the start of this crop, everybody swore India would export 6 million tons “at the most”. Well, that’s it.

The most interesting thing about this news about India is that the government has set an 8-million-ton limit to sugar export in order to avoid an increase on the domestic market – an eight-million limit! If with 7 million tons exported the world already has a sugar surplus, with 8 India will flood the world market. But this news made it to the market disguised as bullish. Go figure. Another million is (obviously) a million less in carryover stock which represents about 11 weeks of consumption – not at all scary.

A stronger Indian sugar domestic market and more sugarcane converging to the ethanol market to decrease the effects of the oil high trend contribute to the picture being drawn for the 2022/2023 crop in India and the 2023/2024 crop in the Center-South which is one of higher prices in cents per pound. But for this crop starting now in the Center-South, as we said some months ago, it will be difficult for prices to support themselves. Of course, there are always black swans and they are out there to make the analysts scratch their heads.

Once again, the federal government has clearly demonstrated they don’t understand anything about economy or any other issue about how to run the country smoothly. A zero-tax rate for importing ethanol, practically at the start of the sugarcane crop in the Center-South, confirms what we already knew: the total cognitive incapacity of those people in power.

How safe is it to invest in a possible expansion of fuel production in Brazil when the definition of the energy policy is in the hands of a group of idiots?

Although the measure is innocuous because importing ethanol right now via the Northeast would cost R$200 per cubic meter above the traded value on the domestic market, it sets a dangerous precedent. And with the real quickly appreciating, maybe importing will be possible soon. Anyway, it’s outrageous to do that right now when the mills are waiting on the start of the crop to face cost expenses.

If it had the least strategic planning, the government could have created mechanisms which would foster regulatory stock building to serve as a mattress at times of shortage through non-subsidized financing and/or issuing of negotiable securities, serving as advance revenue of the mills combined with withholding and distribution of product every time prices went up the wrong way.

Anything goes to try for reelection and God knows what tricks the federal government can use to reach the single goal it has pursued since their first day in office. The next one should be another intervention on gas price. The mills should get ready to take the heat.

To read the previous episodes of World Sugar Market – Weekly Comment, click here

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