World Sugar Market – Weekly Comment – Episode 80

The ball is on the Funds’court

The sugar market in NY still has that bullish idea like there is no tomorrow. We have repeatedly said that the tripod components that support this high prices are: the long position of the funds, built some months ago and financially successful; the absence of mills as a counterpart of the insatiable appetite of the funds due to the fact that they have already fixed a great part of the production volume for export and, last but not least, the fact ignored by many analysts that sugar end consumers have postponed their purchases and/or replacement of inventory betting that the massive influx of sugar at the start of the Center-South crop would put prices in a place that makes sense.

NY closed out the week at 21.14 cents per pound for May/2023, moving 22 points up or almost 5 per ton against the previous week’s close. The other months closed out at weekly highs between 28 and 42 points, from 6 to 9 dollars per ton.

Keeping the sugar price in NY at the current high levels will depend, however, on other factors: the oil price on the world market, for example, needs to go up in order to counter with the expected appreciation of the real against the American currency. Brazil offers real interest rates above 7% per year and it’s just natural that the positive flow of foreign resources will come in abundance and appreciate the real with the solid influx of dollars. Hydrous only gains competitiveness against gas if oil appreciates more than the real. Today, the gas parity with ethanol makes the consumer “forget” about the renewable fuel and fill up with the more competitive gas. With hydrous off the game, the mills will maximize sugar production.

I’d rather not bring up the hypothesis of federal government intervention in fuel pricing. Any price policy that is considered as deleterious opens up the possibility of lawsuits on the part of foreign shareholders with SEC as has already happened before. No leader will want to put his ID on the line since statutory directors and the council can be found accountable for careless management. What Lula rants about to his enchanted naïve audience on the podiums where he lives is something totally different from what reality imposes on him.

Back to the sugar market, since June last year the energy market has suffered huge losses. Type WTI and Brent oil as well as gas have accumulated losses of 18%, 16% and 12%, respectively. Over the same period of time, sugar has gone up 28%. Something seems to be out of whack.

The start of the Center-South crop should set the tone of the market. If there is an effective perception that sugar availability is compromised, that will right away be reflected on the basis (premium the physical pays on the traded value at the exchange). This happens because for the industrial consumer buying the exchange doesn’t do any good; he wants sugar to be able to process his product. High prices at the exchange don’t necessarily imply high prices on the physical. See early 2006.

Someone might argue that the spreads traded in NY reflect this situation pretty well. However, this claim would be true if the real curve didn’t show such a high premium over time. The difference between internal interest rates and external interest rates makes banks offer more real per US$ to the exporters over time. These additional real pressures the sugar price in cents per pound. If there wasn’t any difference between the two interest rates, the futures market would still show an inverted curve (this time reflecting just the supply/demand of the product), but not as discounted as the existing one.

The current concern of 10 out of 10 mill owners is about the hydrous price. The huge discount shown by the market won’t prevent the product from being traded. The least capitalized mills need to make money in order to meet the commitments of the start of the crop while the most affluent will leave the ethanol in the tank. But there is no doubt that increasing sugar production is the priority.

As long as there is available Center-South sugar in the system, a fund manager sitting on a pile of money has all the necessary tools to add on more gas to the fire. I don’t know if you have noticed it, but over the last weeks we have seen the market go through price peaks caused by large orders put in within short time interval. Does anyone believe that the fundamentals changed over those short seconds? Of course, they haven’t. That’s why the market can go up a little more before settling. The ball is on the funds’ court.

The credit squeeze caused by the Americanas (Brazil-based company of department stores) effect has made the integral renewal of recently-expired loans of some mills with financial institutions difficult, a situation that can get worse with the contamination of the SVB bank failure in the United States, the worst since 2008, closed by the regulators of that country. An undercapitalized mill will sell ethanol at any price.

The increase in interest rates to control inflation occurs in several developed countries. The keynote of the companies is to reduce costs and optimize inventory. The family consumption decreases and the industry will buy from hand to mouth. Under this scenario, dear readers, it gets complicated to believe in an upward market. The funds set the tone, though.

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