World Sugar Market – Weekly Comment – Episode 49

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Extremely deteriorated macro scenario

The global macroeconomic scenario has strongly deteriorated over the week with the FED increasing the basic interest rate by 75 points and with the perspective of future adjustments aiming at controlling the American inflation rate which pointed toward 8.6% in May.

The market doesn’t seem to believe that the US will be able to avoid recession which, they say, might last until 2024, and the risk assets have experienced huge falls because of that.

In the weekly accumulated only, cotton leads the fall at 18%, followed by natural gas (17%), RBOB (10%), WTI (7%) and Brent (4%). The overall decline feeds into the panic and – as we know it – panicky markets overreact on highs and lows.

Despite the bad mood, the numbers of the industrial activity in China are better than what was expected (a 0.7% fall was expected and a slight 0.7% expansion was seen), but retail sales suffered a 6.7% downturn. The Brazilian Central Bank increased the basic interest rates to 13.25%. It was a terrible week.

Sugar closed out Friday with July/2022 at 18.58 cents per pound, a 71-point shrinkage compared to the previous Friday. There was a loss of almost 16 dollars per ton over the week. October/2022 and March/2023 also suffered losses of 17 and 18 dollars per ton, respectively. Curiously enough, sugar converted into real per ton had a slight upward trend due to the devaluation of the Brazilian currency by more than 3% against the dollar. So, the converted sugar values improved between 30-40 real per ton over the week.

The funds liquidated more than 50,000 contracts, which is kind of positive because we imagined that a liquidation this big would cause a sharper fall.

Congress passed the 17% ICMS limit on fuels. PIS/Cofins and CIDE on anhydrous ethanol and hydrous were zeroed out until December 31. Since it’s impossible to sugar-coat it, Petrobras readjusted gas and diesel prices that had been dammed for several weeks. The effect of all these changes commanded by the President of the Republic and his allies can be neutralized due to Petrobras increase and the perspective of an oil price rise together with a devaluation of the real against the dollar. It’s a populist, innocuous and vote-getting measure. The bill of this insanity will certainly come in 2023 for us taxpayers to pick up.

Something worth pointing out as a result of this imbroglio is the constitutional guarantee that renewable fuels will have a favorable tax differential compared to fossil fuels. Also, as journalist Celso Ming said in his column in the Estadão newspaper this Friday, the ICMS limit reduces the possibility of fraud in the movement of ethanol from one state to another, whose disparity among rates encourages tax evasion crime. It’s the case of the movements of the product in Rio de Janeiro (whose ICMS was 35%) to neighboring states with smaller taxes. Paradoxically, tax collection might increase with the fraud reduction.

After Petrobras price adjustment, the politicians screamed and accused the company of being against Brazil. This gang of imposters dominating Brazilian politics and sucking voluptuously on the tits of the country without giving anything in return just wants to stand out at election time. And they make the unbearable situation that we Brazilians – who wake up every day to go to work unlike this horde of good-for-nothing – face every day with crisis after crisis in a country without direction even worse. Every day is a stressful day. The shares of the oil company have sunk more than 10% in the middle of this shooting caused by Brasilia. Ah, did you believe in the motto “More Brazil and Less Brasilia” launched by the current president in the 2018 campaign? I did too. That is, the Brazilian citizen continues to be treated like a clown at this circus Brazil has turned into. And there is nothing on the horizon that can make us minimally optimistic.

Rumors late this Friday had it that the Congress wants to surcharge Petrobras in retaliation against the increase given by the company. The President of the Republic wants to start a CPI to investigate Petrobras CEO because of the increase. A culprit must be found urgently. These are attitudes by a Donald Trump from the Jungle that only finds a counterpart in the less developed countries of the world. At least in terms of unpreparedness and sneakiness of the people in power, nobody can beat us. All this shouting serves as a smoke screen for the true and real problem that torments the country: 13 million unemployed people and 33 million of starving people, to mention only two. The rest is politics at the lowest level.

Gas in the USA is expected to reach R$9.50 per liter this summer. In Hong Kong, it costs R$15.20, France R$11.60, Italy R$10.80 and Canada R$9.20. With Petrobras increase and the tax reductions that have been implemented, we will pay less than R$7.00 per liter.

Some mills have noticed some improvement on productivity in the sugarcane fields over the last weeks, but the ATR drop continues to be worrisome. There are mill owners who believe that we will hardly have a recovery of the planned ATR. Depending on the region, people are talking about drops from 4 kg of ATR per ton of sugarcane to 15 kg. That’s really worrisome.

Each 1 kg loss on ATR, considering the current production mix, means a reduction of about 225,000 tons of sugar and 180 million liters of ethanol. If we look at the sector as a whole, less 1 kg of ATR represents more than R$1.1 billion less revenue. Think about that!

Monday is a holiday in the USA and there is no market. So, enjoy your weekend

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

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