World Sugar Market – Weekly Comment – Episode 64

Send the bill to the mill owners

We have gotten to the end of the third quarter of 2022 and with it there is the expiration of the sugar futures contract at the NY Exchange for October/2022, which has shown a physical delivery of 14,652 lots, equivalent to 744,000 tons of sugar.

According to an experienced market trader, one of the receivers will send the product to his refineries or can use it as swap of third parties’ sugar used to take advantage of the huge premiums recently traded on the refined sugar market. As for the deliverers, they might have taken advantage of the strengthening of the October/March spread causing the market to carry sugar until March for them. In the end, there is no surprise there – the delivery wasn’t a directional inductor.

October expired at 18.60 cents per pound, a 32-point appreciation over the week, equivalent to seven dollars per ton. March/2023 – now the first trading month – closed out trading at 17.65 cents per pound, practically unchanged. The contracts for the 2023/2024 (May, July, October, March) and 2024/2025 (ditto) crops have suffered huge pressure over the week coinciding with the dollar appreciation against the real. So, with the Brazilian currency devaluing 3% over the week, NY – in the months mentioned – fell off by 5 dollars per ton on average, however due to real devaluation the average values in real went up about R$35 per ton.

UNICA has informed that the sugarcane crushing in the Center-South accumulated over the first fortnight of September has reached a total of 405.8 million tons, 10.3% less than the previous fortnight, but 2.6% better than the same fortnight last year. If we take the last 5 crops, the accumulated of this fortnight ended up representing 76.1% of all the crushed sugarcane on that particular period. Therefore, it would be reasonable to admit that the current crop should end with a total crushing close to 533-540 million tons, pretty much in line with the market expectation.

Hydrous took a little breath, being traded at R$2.8000 per liter, including taxes, according to Tarcilo Rodrigues, from BioAgência. The value corresponds to 14.50 cents per pound or approximately 350 points of discount against NY sugar (March basis). Conceptually, in commodities the arbitrage between by-products (sugar and ethanol) with the same basis product (sugarcane) tends to come close to zero, therefore either ethanol recovers its value (goes up) or sugar goes get ethanol (goes down).

Most mills seem to be on hold to find out what will happen after the presidential election, whose first round takes place this Sunday, October 2. I wonder how the government will approach the issue on federal taxes on fuels from 2023 on. A part of the market has simply decided not to sell hydrous and wait on the ballots and this attitude might have artificially contributed to the hydrous market steadfastness over the last days.

If the tax exemption is extended, the tendency is – everything else unchanged – for the next crop to be more sugar-based and then we can see a flood of sugar which will pressure NY quotations. The devaluation of the Indian rupee moves that country’s sugar break-even point to 18.50 cents per pound. Since Indians are closer to countries that consume sugar in Asia, it’s just natural that their sugar trades at a premium over NY due to the maritime freight difference. So, NY at 18 cents per pound should be an important balance level. However, NY is already below that – 140 points below for the 2023/2024 crop and 190 for the 2024/2025 crop.

India should increase the percentage of ethanol mix in gas from the current 10% to 12%. That’s positive because it withdraws sugar from the world market. The country has benefited from the recent high prices and went through a crop without having to subsidize the sugar market. If the sugar prices in NY plummet, the subsidies might return. A subsidy of ₹3,000 puts the break-even point at around 16 cents per pound. If it is reduced to ₹1,500, the break-even point moves to 17 cents per pound. Is this the market floor?

Sunday’s an election day in Brazil. If PT (Workers’ Party) returns, the sector can expect to be treated like it was in the past, over the infamous 14 years of PT was ruling, that is, it will be called to pay the bill, be it through fuel price control, be it through some kind of subsidy or price management mechanism. Just remember that over the last ten years under PT’s governments, 6 with Dilma and four with the ex-prisoner now running, 60% of the time the sector sold hydrous below the production cost.

If we have another four years under the incumbent president, as he himself has already promised, the federal taxes will stay zeroed and the administered prices via Petrobras interference can be damaging for the expansion of the sector.

Taking into account the possible change of the world energy matrix post-war and the crisis that has hit Europe in this sector, the world might demand a huge volume of renewable fuels over the medium and long term and Brazil might miss out on a great chance if there is no expansion, strategic planning and legal safety for the prospective investors.

So, regardless of who will sit in the presidential chair in 2023, the sector must seek strong and active representation in Brasilia, someone who will speak firmly and vigorously and can put pressure on the Government and on the Congress so that the decision-making doesn’t jeopardize their legitimate interests, someone who looks like the sector. Otherwise, it will be like it has always been like, the famous “send the bill to the mill owners.”

You all have a good weekend

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

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