World Sugar Market – Weekly Comment – Episode 50

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Doubts linger on

The sugar futures market in NY closed out Friday with July/2022, which expires next Thursday, traded at 18.35 cents per pound, a 25-point drop over the week (5.50 dollars per ton), followed by the other months, all in the red, with drops between 13 and 46 points (from 3 to 10 dollars per ton). Everything suggests that the sugar physical delivery in NY when July/2022 expires will be a non-event again.

June has been a gloomy month for commodities. Cotton has already dropped by 30%, natural gas by 23%, soybean oil by 14%, corn and soybean by 9%, WTI oil by 6.5%. The good news is that this drop in the major commodities can be a truce on global inflation in addition to taking the pressure off of the interest rates. The markets would really love to be able to breathe less stressfully again. Can they? Light a candle for your guardian angel and let’s see how things will play out.

The non-indexed funds have reduced the long position even further according to the numbers released by the CFTC showing a settlement of 11,586 lots. Based on last Tuesday’s position which is used as the basis for the COT the funds were long by only 59,575 lots.

In two weeks, the speculative funds liquidated more than 60,000 lots (equivalent to three million tons of sugar). Just think of the damage this sell-off would have on the market in NY if the mills weren’t well fixed. Anyway, with this huge liquidation of the funds, is it reasonable to think we are close to price support? Or are we going to break the 18 cents per pound in October/2022? That still depends on a lot of factors.

As of this Friday the federal taxes (PIS/Cofins) are no longer charged on gas or ethanol while the ICMS on both, keeping the 17% limit, still depends on the publication on the Official Gazette of each state. The complexity of the changes affects the data systems of the states that have to correct their programs so that the issue of bills of sale is accepted incorporating the tax changes. A conciliation hearing between the states and the Union in order for them to try to come to an agreement has been called by the Supreme Minister Gilmar Mendes and will be held next Tuesday.

The hydrous market is restricted and nominal while everybody tries to take in the changes in the tax rules and makes calculations to find a break-even price. According to B3, hydrous is trading at discounts of 150-180 points against sugar in NY. If we incorporate the CBio value, this discount drops to 75 points.

There are doubts over the brains of the productive sector about how the ethanol market will work as of January 1 when the federal tax resumes being part of the pricing. The fact is that this imbroglio caused by a president desperate to make it to the election run-off in October, chasing Petrobras, will strongly reverberate on the vision of the foreign investor as to how legally insecure it is to invest in Brazil.

The sector can get ready to foot the huge bill of a possible change in Petrobras fuel pricing to be used by politicians supporting the President and also a change in the law of the state-owned companies allowing politically appointed officers to hold positions in the management of the oil state company.

Brazilian kleptocracy is doing very well. The Banana Republic Brazil is turning into, makes countries like Sudan, Syria, Somalia, Venezuela and North Korea envious. According to NGO Transparency International, Brazil is more corrupt than Tanzania, Vietnam, Ethiopia, Burkina Faso, Benin and Ghana.

The real currency is still devalued against the dollar in a combination of a domestic crisis fed by the corruption of the Education Ministry with the arrest of a former minister and the international scenario of risk aversion. The dollar closed out Friday at R$5.2500 shrinking 2.3% over the week. Sugar prices are still appreciated in real per ton, gaining R$60.00 per ton on average over the week.

Capitalized mills and with tanking structures have already warned that they will hold the ethanol up until the start of 2023 considering the additional value the fuel should have after New Year’s. If this is the market spirit, we might see the contracts of October/2022 and March/2023 in NY reflecting this attitude. Smaller ethanol availability can push domestic prices of the product reaching its arbitrage with sugar and, therefore, NY can go up.

Four months have gone by since the Russia and Ukraine war started and there is no perspective on the horizon about when it will end. And to paraphrase the British then Prime Minister Churchill during the Second World War, “this is not the beginning of the end, but maybe the end of the beginning”. Meanwhile, the pessimism about the global economy, China’s slowdown, the inflation (on food and energy) that is shaking the planet, together with the increase in interest rates, discourage the investment and inhibit any dream of expansion in the medium term.

Evidently, in Brazil, except for those who believe in the old speech of Minister Paulo Guedes, for whom the Brazilian economy “is doing pretty well and better than the rest of the world”, the situation isn’t any different. Truth be told, those who watch the minister’s interviews – usually an audience of converts – are impressed by his delusions about the parallel universe he seems to be living in. It deserves the Oscar for special effects.

You all have a great 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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