It’s important not to lose focus
The macroeconomic scenario is worsening fast fed by liquidity problems of the European banks, first the Credit Suisse and now the renowned German Deutsche Bank and Commerzbank. The world is facing an atmosphere – maybe not as bad as – that reminds us of the crises we saw in 2008. Nobody knows how this will play out. However, it’s reasonable to be careful and not flirt with unnecessary risks.
Over the last twelve months, the deterioration of the commodities is visible. The drop is led by energy commodities. Natural gas, an important component of the European beet sugar pricing, has melted by 59% in twelve months. Gas, type Brent oil, which serves as reference to Petrobras, and type WTI have had accumulated losses of 24%, 42% and 38%, respectively, in twelve months.
Even in this sharp devaluation situation, both gas and oil, according to some respected analyst on the energy market, have room to drop due to the American decision not to reestablish the American strategic oil reserves (in order to jeopardize the Russian economy) and the recession that is knocking on the door of the western world with most countries increasing interest rates to control inflation.
Here, the pitiful performance of Lula and the Central Bank president, like two fighting boys from the fifth grade, is motivated by the Central Bank’s maintenance (out of spite maybe?) of the outrageous real interest rates – the highest of the planet – of the Brazilian economy. With this attitude, the Central Bank, which could have at least had the common sense to signal to the financial market the possibility of a future reduction of the basic interest rates in the short term, especially in a situation where there is reduced credit due to the Americanas, pushes any possibility of economic recovery downhill. Wanting Lula to show any respect for the independence of the Central Bank is a lost cause. But it’s a fact that the president of the Central Bank is behaving with little professionalism and maturity that his job demands. There is a shortage of politicians and public agents in Brazil who think about the country. Wearing a green and yellow shirt isn’t enough.
What with the domestic and foreign environments, it’s amazing how sugar can stay at the current levels. Don’t forget that over the last twelve months, along with orange juice, sugar was the only commodity that has had a positive variation.
In NY, the sugar futures closed out the week at 20.84 cents per pound for May/2023, a 17-point variation in the week, equivalent to a little less than a 4-dollar-per-ton high. On the crop average, 2023/2024, that is, May-July-October/2023 and March/2024, improved only 10 real per ton over the week. For the 2024/2025 crop the weekly variation was negative by 12 real per ton against the previous Friday.
The devalued real against the dollar, a reflection of the adverse international scenario and of the weakness of a government made up of a plethora of incompetent people, keeps the devastating effect of the gas price meltdown abroad from being worse to the gas parity with the hydrous, today trading at a discount close to 600 points against the sugar. That’s Lula’s administration contributing to the sector.
Ironies aside, more mills have started looking closely at the export sugar pricing for the 2024/2025 crop, since the fixation for 2023/2024 must be close to 80% and there is little to be done at this start of the crop. The curve in real provided by the generous spread between the internal and external interest rates, offered by the banks via NDF, pays 2024/2025, with a good margin even taking into account a possible increase in production cost, R$2,343 on average per FOB ton equivalent.
In short, we have a situation where the external scenario shows a combination of unlikely world economic growth, pressure on fuel prices, interest rates increasing in several countries, inflation rate that reduces household buying power and steady geopolitical instability with Russia, Ukraine, China, Taiwan and the United States as key players.
But sugar has been unscathed by all these issues and many people believe that the commodity price will keep going up for a long time to come. The vulnerability of the industrial buyers, who didn’t restore their inventory, have a major burden right now in addition to the absence of the mills to provide liquidity to the appetite of the funds that, according to the now updated COT are long by 174,000 lots.
The bullish narrative holds the strong conviction that India won’t export more than 6 million tons mentioned in every corner of the world, that the grain crop in Brazil will get the ports in the Southeast congested and, therefore, sugar shipment will face serious logistic problems; and, of course, El Niño, the world deficit, among others.
As for the mills, all they can do is only pay attention to the fundamentals and find a plausible reason not to fix their sugar at such attractive prices. The fixing price today for May/2024 corresponds to R$2,429 per ton, which over the last 24 years represents 15% of all the events already duly adjusted to the inflation rate. That is, from 2000 up to now, out of 85% of the times, the traded price was below that value.
Though the imponderable thing always seems to play a trick on us, there are several alternatives to minimize it by using derivatives that allow for participation in the upward trend if the market keeps going up. But please just don’t use that so-called accumulator!!!
To read the previous episodes of World Sugar Market – Weekly Comment, click here
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