World Sugar Market – Weekly Comment – Episode 90


In Lula’s Brazil, version is a lot more important than fact. It’s a fact, for instance, that the energy market has melted around the world with the oversupply of oil and strengthened by the rise of global inflation and the explosion of the interest rates that stifle consumption. To put numbers to this narrative, look at what has happened to the energy market over the last twelve months: natural gas has evaporated 72%, while WTI and Brent oil (which serve as reference to Petrobras) have shrunk 32% and 30%, respectively. RBOB has dwindled 31%, while corn has shrunk 29%. Here south of the Equator, the Brazilian currency, in a combination of internal and external factors, has appreciated against the American currency. These are the inexorable facts.

The version engineered by the team of the anachronistic President, after announcement about the reduction of the fuel price by Petrobras, is that Brazil is finally making gas price more “Brazilian. That’s a sheer fanciful idea of the airhead President and applauded by his Party horde of fools. Fuel price reduction was already ready due to the abovementioned elements. That is, the price was reduced because the international parity made it possible and that’s that. What the government did was to take advantage of the situation and put a new spin on it so it would best satisfy Lula’s appetite for third-rate populism.

The problem is the perception that the market has towards how harmful this change in pricing can be to the sugar-alcohol sector. On one hand, structural changes in pricing, dropping the international price parity, go against the principle of governance and compliance within the company, which never tires of issuing statements whenever someone outside its circle – like the Finance Minister, for example – offers crazy opinions. On the other hand, the board of the company knows pretty well that a possible price policy that hurts the shareholders will cause it and themselves huge legal problems. Who will want to put their ID on the line?

Deep down, Petrobras president has smartly taken advantage of the oil drop on the international market and announced the reduction in fuel price hiding the real reason (the melting of the prices out there) patting Lula’s head, as if he was just following orders from the boss. The important thing is the version. I want to see how brave these people are when oil price goes up. How Brazil can survive having in the central government born-ignorant people sometimes and sometimes depressing douchebags is disgusting.

For the sector, the global energy picture is discouraging. Hydrous melts when it trades with an unusual discount of 10 cents per pound against sugar. This is a big setback for the mills. A part of the mix produces 700 points of positive margin while the other part imposes a negative margin of 400 points. Depending on the production mix and on how efficient the risk management is, a year that propagated generous profits can turn out to be a huge disappointment.

And sugar in NY declined almost 200 points from the highs. The futures market in NY closed out Friday’s session with July/2023 at 25.80 cents per pound, a 42-point reduction in the week, equivalent to a little more than nine dollars per ton. The months with shorter maturities dropped further. Those who have their eyes on the hedge for the next crops, the NY drop was just about compensated for by the 1.5% devaluation of the real in the week, closing out close to R$5.0000.

The funds reduced the long position by only 2,600 contracts, but they are sitting on almost 216,000 lots, according to COT published by CFTC (Commodity Futures Trading Commission), this Friday. People say that many mills have sped up the fixations for the 2024/2025 crop, whose total volume we haven’t compiled yet, but the market believes it is at about 10-15%.

CBIO (De-carbonization Credit) traded at B3 reached R$111.90 (equivalent to 55 points in NY), a significant high of 12% in the week, showing that the market is assuming that the mills will produce as much sugar as possible and the hydrous can have its availability reduced. CBIO is a good indicator of this trend.

While all the sugar market looks upward, with people betting on prices above 60 cents per pound (no, it’s not a printing error! That’s right: 60 cents per pound), the Center-South sugarcane crop shows a performance 18.8% better than last year’s. “Well, but we are just starting”, the bulls mumble. The fact is that we are crushing more at an ATR 2.5% better.

A normal picture, without climate mishaps, can increase sugarcane production in the Center-South beyond 600 million tons of sugarcane. Besides, the good prices and the drop in inputs will provide for better cultivation care and maybe an even larger crop for 2024/2025. Not without reason are we looking at faster fixations for next year. The reason is simple: less real along the futures dollar curve, via NDF (Non-Deliverable Forward), due to the expected reduction in domestic interest rates.

The average closing price for July/2023, October/2023 and March/2024, which make up the 2023/2024 crop of the Center-South, was 25.45 cents per pound this Friday. For the 2024/2025 crop, it is a loss of 72 dollars per ton. In the 2025/2026 crop, it’s an additional loss of 64 dollars per ton. That is, in two crops, the price falls more than 135 dollars per ton. We will need a lot of narrative to increase future prices. And this is a fact.

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

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