World Sugar Market – Weekly Comment – Episode 63

Bad macro scenario may drive NY to 17 cents

The world macro scenario worsened even further over the week that ended Friday. While the Central Banks raised the interest rates to hold back the rampant inflation, the world seems to be quickly heading toward an inevitable recession in 2023. The amount of money injected into the economies to face the global slowdown caused by Covid-19 has now brought the bill to be paid. Excess cash injected into the economy causes inflation and the Central Banks took too long to stop it. Now they are increasing the interest rates to stop inflation they themselves created and recession is knocking at the door. Is anybody still surprised?

The energy market has collapsed, WTI has traded at 78 dollars per barrel, while Brent which serves as reference for Petrobras has sold for a little over 85 dollars per barrel, a drop of 7.0% and 5.0%, respectively, over the week. So, it’s expected Petrobras will adjust the prices downward soon. Will hydrous follow suit?

Sugar in NY ended negotiations with October/2022 – which expires next week – appreciated by 40 points against the previous week, which was at about 18.28 cents per pound. The October/March spread appreciated 32 points, or seven dollars per ton accumulated over the week, showing a possible delivery movement of sugar on the expiration of the future contract of October/2022 next Friday, September 30. Let’s wait and see.

Meanwhile, the non-index funds increased their short positions and based on Tuesday’s data released by the CFTC they are short by almost 41,000 lots. With this exposure of the funds in the midst of an anemic energy market, the pressure on NY sugar will continue and the March/2023 contract might go after the 17 cents per pound.

Some factors have contributed to a possible drop in the support level of sugar in NY: the maintenance of the basic interest rates of the Brazilian Central Bank and the increase in the FED interest rates together result in the decrease of the spread smoothing over the future curve of the real; the Indian rupee devalued against the dollar and the break-even point of the Indian sugar is now closer to 18.50 cents per pound (it was close to 19.50 before). The hydrous price has slightly recovered from the sharp drop it suffered, but is still trading close to 400 points of discount against NY, that is, below the production cost. Depending on how the market will work as of January/2023 with a new government in Brazil, if ethanol doesn’t bounce back, we will certainly have a greater availability of sugar predicted for the 2023/2024 crop.

Last week’s comment about the possibility of us having a constructive market next year, created some responses among the more attentive readers. A sector expert comments that “the sector is highly dependent on government regulations and doesn’t respond to future facts and scenarios just with economic rationality. There will always be government interventions caused by short-term facts, which destroy the little trust there still is in long-term regulation that could guarantee sustainable growth of the sector, with economic rationality”. That’s sadly true. During the PT (Labor Party) governments, the sector paid too high a price, be it by indirectly financing the auto industry via price reduction of domestic fuel, be it because of the stupid domestic gas pricing which – imagine that – repeats itself now with this government which promised to let the market free.

Another expert questions if the companies are “taking care of the sugarcane field”. He ponders that “[as long as one of these large companies] doesn’t look at sugarcane seriously, the neighbors won’t be able to increase their production, because the lease price [negotiated by them] at any price hinders the growth of those who can do the math!” He goes on to say that “it’s too bad the sector went from generation to generation and lost operational and entrepreneurial quality. Those who consolidated or came from abroad really screwed up on the speed, focusing on the industry (not on the sugarcane) and hiring cocky professional managers from Faria Lima who couldn’t lead their teams and hordes of workers”. It’s a subject that deserves deep thinking.

You all have a nice weekend.

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

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