World Sugar Market – Weekly Comment – Episode 70

As firm as Jell-o

Nobody can complain about the sugar market being boring. Monotony and boredom haven’t been on the menu offered by the sugar market in a long time. Something unexpected always happens and pushes the prices in the opposite direction of the one everybody was expecting – even this poor scribe.

We have pondered that the sugar market in NY will have great difficulty trading and staying above the 19 cents per pound for several reasons presented at length but worth going over again here so everybody can understand them.

These reasons are: A) a world recession requires optimized inventory management, so industrial consumers, under an inverted futures market, such as sugar, will tend to work with an absolutely necessary inventory, or as they say, from hand to mouth; B) current prices make room for Indian exports limiting price hikes; C) the uncertainty about the return of federal taxes on gas puts a sword over the market, that is, we can have a more “sugary” mix if the hydrous keeps being traded at a discount.

But NY couldn’t care less about the above considerations. The futures contract for March/2023 closed out Friday at 19.59 cents per pound, 91 points above the previous week’s closing, equivalent to an appreciation of 20 dollars per ton.

Besides, the Brazilian currency has devalued against the American dollar, accumulating a fallback of a little more than 5%. So, the sugar values in NY converted into real using the NDF (Non-Deliverable Forward), appreciated 147 real per ton against last week. Will we have a trend reversal ahead?

Actually, the market in NY reflected the default by a few Indian mills that sold the same volume to another trader at higher prices and didn’t perform the contract they had at lower prices. Technically, the sugar will catch up with the foreign market anyway, but, meanwhile, the hedge structures made by the trading companies that are part of this negotiation need to be dismantled and NY might have been infected by that. This firmness of the market has Jell-O-like consistency. That remains to be seen.

People say that 400,000 tons would be in this situation, but that’s not strong enough to disrupt supply. However, the market usually responds more intensely when the word “default” is mentioned. Why doesn’t the injured party (the trading companies) file a lawsuit against the mills in the Indian justice system?

First of all, the mills in India play an important social role, because they supply farmers with direct income. A mill can have an impact on the financial life of 50,000 people. Another point is they are private property and many of them are run by politicians. [Before you frown upon it thinking about the corruption of Indian politicians, you should remember that according to Transparency International NGO, on a scale from 0 to 100, Brazil has 38 points and India 40. Denmark is the least corrupt with 88 points.]

Back to the subject, if a trading company files a lawsuit in India, these political influences are strong enough to interpret the laws so that the trading companies can see their financial liquidity dissipate. Therefore, filing a lawsuit has no effect. There is an instance of a trading company that operates in Brazil that has been fighting unsuccessfully in Indian court with some mills in Maharashtra for twelve years.

Speaking of ethanol a little, the hydrous got to trade at close to R$3.0800 tax-free per liter, equivalent to sugar at 17.50 cents per pound. This value, considering the CBIO benefit (equivalent to 0.47 cents per pound) and the premium paid for the sugar on the physical market amounts to a discount of 175 points against NY. This difference should narrow, showing a business opportunity (sell sugar and buy ethanol at B3).

The president-elect scares the financial market with his last century ideas (or is it before last?) about economy. We couldn’t have expected anything better than what we already know. Brazil has suffered with these populists that have infested Brazilian politics since Getúlio Vargas, with very few and honorable exceptions (JK, FHC and Temer). Only God knows what’s ahead for us when this guy takes office on January 1st.

The Stock Exchange in Brazil dropped 5% over the week and the real devalued 5.74%. The share of some companies is too cheap, according to analysts, and that can attract foreign investors to take advantage of some bargains. The movement appreciates the real. The mood of the market needs to change a lot.

Our neighboring Argentina has announced another of those measures tested through exhaustion in Brazil and that have never worked out. According to Reuters, the Argentinian government has made a deal with supermarkets and consumer goods suppliers to freeze or regulate prices of about 1,500 products, aiming to control an inflation rate edging up on 100% this year. When you think Brazil is in a mess, take a look at our siblings down South.

You all have a great weekend.

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

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