World Sugar Market – Weekly Comment – Episode 57

Punching Clown

The sugar futures market in NY closed out the week with October/2022 at 18.65 cents per pound, a 71-point recovery against the previous week, equivalent to 15.65 dollars per ton. As the American currency devalued 1.81% against the real in the weekly accumulated, closing at R$ 5.0700, the price hike in NY ended up being partially neutralized and the sugar values appreciated a little more than 30 real per ton, equivalent to 30 points vis-à-vis the 71 points of the appreciation mentioned above.

The prices in NY converted into real have plummeted since the second week of July, from the July 18 peak, when the market closed out at the equivalent to R$ 2,400 per ton to the current R$ 2,150. Since these prices refer to the first trading month in NY (October/2022), there is still little sugar available to sell and fix against this maturity, but it’s natural that the drop makes the managers in the mills scratch their heads, imagining they have missed out on a fixation opportunity.

The sugar price drop in NY reflected a series of events that were detrimental to the market, the major one being – in our opinion – the imbroglio caused by the change in the fuel taxes. That was a shot in the foot given by the President with totally vote-getting purposes and counting on the approval of a navel-gazing Congress. The measure jeopardized the survival of ethanol, which lost the competitiveness against gas and in order to recover it the mills will have to give up on the margin or wait on better days which we don’t even know will ever come.

If the government had allowed the market to adjust itself, it wouldn’t have to mess with the taxes (which jeopardized the states due to the decrease in revenue), wouldn’t create a fiscal shortfall which will be felt – according to some serious economists – from the second quarter of 2023 on, regardless of who goes up the ramp of the Planalto Palace in Brasilia on January 1, 2023, and the market would adjust everything. However, we have unquestionably shown that there is no organization of ideas, planning, strategy or basic understanding of how the market works on the part of the Executive, which in turn is advised by an ivory-tower minister who thinks everything is going pretty well.

According to a São Paulo federal representative who was at the ABAG Congress last week, it’s highly probable that the federal government will extend the federal tax (PIS/Cofins) exemption until late January/2023. As you can see, planning in Brazil is very easy and it is even better in sectors that suffer government interference.

What seems to be a constant thing is that government after government, no matter what the ideological color each one carries, the sugar-alcohol sector invariably plays the role of a punching clown, that round-bottomed child’s toy used as a target and that always rights itself no matter how hard it gets pushed or punched.

The volatility of the sugar market is still high. Looking at the last 20 days of trading at the exchange, we realize that the annualized volatility has gone over 28%, well above the average 22% of 100 days. This happens when the markets fluctuate more in relation to the average price caused by insecurity, uncertainty or when the certainties themselves are too fragile to be trusted. We have a large number of exogenous and endogenous situations and factors that corroborate with that.

Given the number of variables we need to deal with to make a decision, there is no guarantee that the sudden changes in the fundamentalist picture can turn the market upside down. And the funds are part of this scenario: they are still short by about 66,000 lots and look comfortable with this position. That’s where the danger lies. As we have said previously, staying short almost at the recent lows requires courage, steel nerves and a deep pocket. On the other hand, the total absence of new facts in the fundamentals seems to endorse their position. Let’s see.

The macro picture is calling a truce. The commodity and stock markets have been calmer this week. All of the commodities closed out in a positive territory. On Sunday, numbers for the Chinese economy will be published and next Monday might be pink – or not…

WTI and Brent oil are already trading at prices pretty close to those seen before the start of the Russia invasion of Ukraine. This means that all the noise caused by the fear of a shortage has faded away and the oil supply has been greater than the demand, which has reflected on an economic downturn. How about that story of a large financial institution “alerting” for the danger of oil reaching 380 dollars per barrel? Well, those who bought believing in it, made it possible for someone to sell and make a profit. When a smart guy runs into a moron, they usually do business.

Two sentences taken from the delightful book “Maldade” by Gustavo Franco are very pertinent to our current days. “There are societies that look up to their thieves up to the limit of idolatry” (Francisco Rosell, Spanish journalist) and “Brazil is the only country in the world where communism is taken seriously” (Paulo Francis, journalist).

Have a great weekend and Happy Father’s Day.

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

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