World Sugar Market – Weekly Comment – Episode 65

Without enthusiasm
The sugar market showed great recovery over the week, closing out Friday with March/2023 trading at 18.69 cents per pound, a 101-point appreciation (equivalent to a little over 22 dollars per ton) against last week.

This recovery can be partially attributed to the performance of the energy market as a whole. Heating oil, RBOB and Brent increased 22%, 15% and 12% respectively over the week, but the difference between the gas price administered by Petrobras and the world market is at 8%. However, so as not to lose votes in the final stretch, the president running for reelection should push the company to hold off on any fuel price readjustment until the elections are over, of course.

In view of better domestic fuel prices (even if it is after the second round) and the possible comeback of federal taxes on fuels, it’s believed that the pressure on sugar will decrease even if the path to a level over 19 cents per pound is hard due to the world macro scenario and the fact that 18.50 cents per pound makes India start “to like the market” and ready to pour at least 8 million tons of sugar.

The appreciation of almost 4% of the real against the dollar in the weekly accumulated is a response to the election result which showed a meaningful renewal of the Congress seats. Brazil has turned to the right, though both extremes are represented, and the foreign investors interpret the move as being favorable to creating a positive environment for important approval of reforms such as administrative, political, among others. Since I have already seen this movie before, it’s best not to get our hopes too high up.

Another point is that the market – that is, foreign investors – has already accepted the possibility of PT’s ex-president getting reelected. If he is, however, he will face a Congress with obstinate opposition. It will require exhausting negotiations at both Houses, and he will have to throw away the anachronistic PT’s handbook and bring the extremes closer to the center. Only time will tell whether he will be successful or not.

For the sugar-alcohol sector specifically, due to the past performance of both, we have the incumbent on one side, who will interfere with gas pricing, sticking his nose into Petrobras, and on the other side, there is nothing different. An opponent who longs to create a “Brazilian” fuel price – whatever that means. After so much corruption in the state-run company during PT’s degenerative governments, it’s believed that today the company – due to the strict governance and compliance – has mechanisms to curb thefts and corruption. It’s best not to get too enthusiastic, though.

If the current president wants to be reelected, he will have to adapt his raging speech and bring part of the voters he lost over these four years to his side. Once elected, he will have a favorable Congress and a window of opportunities to pass important laws for the country’s development. It’s a golden opportunity if he knows how to use what his opponent didn’t know or didn’t want to do when he was elected in 2002 with huge popular support. It might work out, but dear and improbable readers don’t get too excited about it.

Comparing the polls for president with the result of the ballots, it’s been concluded that the institutes are using methodologies unable to pick up on trends. Not wanting to head down the path of conspiracy theories, the fact is that there are famous mistakes when it comes to polls. The most recent one was when the major institutes in the USA pointed to Hillary Clinton’s win against Donald Trump. The methodology didn’t understand that lots of democrats didn’t go vote because Hillary’s victory had been taken for granted. On November 3, 1948, Chicago Tribune newspaper printed on its first page that Thomas Dewey would win the presidential race against Harry Truman, then the officeholder. Truman got reelected by 114 votes.

Getting back to the sugar world, the market is working with this year’s crushing coming up to close to 538 million tons. For 2023/2024, the growth – if there is any – shouldn’t be more than 3%, according to several mills. The open question about how gas price will be made up as of 2023 slows down the planning for the coming crop.

Regardless of who will sit in the presidential chair, it seems like there is some consensus on the financial market that the real should appreciate against the dollar next year if the forecasts for heavy investments come true. Some people put the dollar at R$ 4.5000. Besides, sugar production cost for 2023/2024 in real per ton should be smaller as a result of the price drop of several inputs that started at a higher basis due to the war between Russia and Ukraine.

India is starting its crop projecting to produce 35.5 million tons of sugar. They start with a reduced stock of 6 million tons, believe that consumption should be 27.5 million tons (if we hadn’t had a pandemic, this consumption would be at least at 28.5 today), and should export 8 million tons of sugar. With their currency devalued, the product cost in US$ has dropped and their break-even price must be at about 18.50 cents per pound.

Over the medium term, taking into account the more favorable scenario for the Brazilian economy after the elections, we can expect a support at about 17.00-17.50 cents per pound in NY prices. But all this will happen if oil continues to be at the 80-90-dollar level per barrel. Right now, nobody believes there is a chance for the oil market to go below 60 dollars per barrel, which would totally change the more constructive behavior of the market.

You all have a good weekend

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

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