Bad start for the crushing in the Center-South raises more questions
The expiration of the May/2022 futures contract this Friday resulted in a sugar physical delivery of a little over 180 thousand tons. It wasn’t an important event that could bring any change to the fundamentalist picture of sugar. May/2022 expired at 19.38 cents per pound. July/2022, now the first maturity, closed out the week at 19.14 cents per pound, a negative fluctuation less than two dollars per ton.
The real devaluation due to the macro scenario that rejects the risk hit the risk assets and put the commodities into a bad-humor mode. In the weekly accumulated, the commodities that devalued the most were oat, coffee, wheat and sugar – everything that you have for breakfast.
The North-American currency closed out the week appreciating above 3.5% at R$4.9700 and inflating the values of the sugar quotations converted into real at the NY exchange. The corresponding months of the 2022/2023 crop in the Center-South increased R$72 per ton, while those of the 2023/2024 crop gained R$64 per ton over the week.
The bad start (low yield) for the crushing in the Center-South brought the appropriate price support led by the adjustment of the books of the trading houses with heavy exposure in physical sugar and by the funds that keep going back and forth frenetically, sometimes buying and pushing prices high up (remembering that NY hit 20.51 cents per pound), sometimes blowing up the market by settling the purchases pretty aggressively (NY even dropped up to 18.73 cents per pound). Based on the numbers of the COT (Commitment of Trades), the funds have reduced their purchase position by 36,000 lots, but are still long by 139,000 (seven million tons of sugar).
This wide price range seen on the market, that is, 180 points in just 10 sessions, considering that the commodities futures market is a zero-sum game and that the open interest varied by almost 90,000 lots over the same period, shows that a money transfer from a pocket to another was significant – a euphemism for painful.
The sugar fundamentals for 2022/2023, in our opinion, point to a global market well supplied with sugar, with no perspective of any complication in the horizon. India is already speaking about exporting above 9.5 million tons of sugar, having already exported 5.8 million tons and booked sales of at least 7 million tons.
Paradoxically, the market hasn’t dropped any further at this start of the crop in the Center-South because the Brazilian mills are already fixed by at least 20 million tons of sugar and, therefore, cannot add on new sales until they are comfortable with the total volume produced when the end of the crushing comes up. Besides, the mills should take advantage of the profitable prices of the hydrous ethanol which closed out Friday at R$ 4.0700 per liter, equivalent to the sugar quotation in NY plus a 90-point premium.
But hold on a minute. Isn’t this news bullish? Yes, it would be bullish if Brazil didn’t have contractual obligations to deliver 20 million tons of sugar to this crop; that is; if it hadn’t dumped 26 million tons on the global market over the last twelve months; or, if India hadn’t sharply increased its exports in this crop; or also if Thailand didn’t have a promising and large crop ahead; and if inflation and the increase in interest rates at a global level didn’t bring about true concerns that end consumers should “work hand to mouth”.
For now, the NY curve shows a market slightly on carry (3% per year), which cancels out the thesis about the lack of product. There might still be problems in this sugarcane crop in the Center-South, especially problems related to the yield of the sugarcane field. The first numbers published by UNICA show 10 kg less of ATR per ton of sugarcane compared to last year’s numbers.
“Might this crop have any resemblance to the 2011 crop?” a mill owner teases. If it does, it can be explosive. But it’s still too early.
