Some food for thought
The sugar futures contract in NY for March/2023 tried hard to break the strong resistance of the 19 cents per pound a couple of times, but it didn’t succeed. And it will sure have a huge obstacle to do so under the current global picture. A series of endogenous and exogenous elements interpose in what has become an intricate sugar pricing on the world market. Let’s try to go over some of these elements in the following paragraphs.
One of the main aspects to observe right now is India. The country should take advantage of each opportunity it has to export its sugar (raw) benefiting from the recent devaluation of the Indian currency against the dollar, which shifted the break-even point (read production cost) of the Indian sugar below 18.50 cents per pound according to Friday’s closing. Besides, the spot market has been paying heavy premiums for the Indian raw sugar.
That country’s government understands that the inventory is historically low and its main challenge will be to balance a regulatory inventory that won’t wear out the internal price of the product (which has providentially been falling) within an inflationary environment and a profitable export that will celebrate another year without subsidies from the government.
Soon India should certainly open license for sugar exports in two stages; the first one is already expected to contemplate a volume of 6 million tons of sugar. According to Indian sources, at least a million tons of this volume has its prices duly fixed in NY already and the shipping of 1.8 million tons of sugar is expected by the end of December.
In our opinion, another exogenous but very important element in the short term is that today Brazil is one of the few countries that show real interest rates. Thanks to a Central Bank that forestalled them, the interest rates here increased robustly enough to curb an inflation that looked reluctant and that now looks like it is being tamed. Well, this increase in interest rates compared to the inflation carries a net real interest rate of 4.4% per year (that is, your capital doubles in 16 years with a rate like that), an impracticable remuneration in the major economies of the planet.
Therefore, after the results of the ballots, it’s believed that a great volume of foreign resources should arrive in Brazil, appreciating the Brazilian currency. This week, the dollar hit R$5.1400 on Friday, retracting almost 4% against the Brazilian currency. If everything stays unchanged, a real appreciation jeopardizes hydrous ethanol, whose price keeps proportionality with gas price. Let’s see if that’s right.
Just as an example, today the gap between Petrobras gas price and the foreign market is around 6%. It’s obvious that the company won’t adjust consumer prices before the elections so as not to hurt the president-candidate for reelection. Petrobras price represents a dollar of R$4.8500, that is, it’s like it has incorporated a 6.3% appreciation of the Brazilian currency to the price. In short, despite the positive flow of foreign resources expected after the second round of the elections, its effect on hydrous should be neutral, at least up to this appreciation percentage. However, some analysts think that the dollar can drop to R$4.5600. But what effect would that have? I will answer it.
Oil is another strong element in building scenarios for the sector. A possible drop of the commodity below 80 dollars per barrel (Brent type), lights up the warning light and would encourage the mills to rethink the production mix for the 2023/2024 crop, putting more emphasis on sugar and, therefore, pressuring it.
Another relevant point is the Center-South production for the next crop. Numbers popping up here and there show a growth in sugarcane production – though still premature – to 580-585 million tons. With India doing as it pleases in the Center-South off-season, the global market might be pretty well furnished by the time Brazil starts its sugarcane crushing. Of course, this will pressure prices.
These elements that partially make up the huge jigsaw puzzle of the sugar-alcohol market seem to show that 19 cents per pound is an important resistance that makes India a vigilant “watchdog”. On the other hand, if a real appreciation makes imported gas price cheaper and in light of that it reverberates on the hydrous price, sugar production cost in the Center-South – using the same parameters – can come to 17.50 cents per FOB Santos pound (including depreciation, amortization and financial cost). And if the dollar hits the abovementioned R$4.5600, the cost would skyrocket to 18.50 cents per pound!!!
So, unless there is a substantial change in the scenario taking shaping, it seems reasonable to us to assume that sugar in NY will stay within a limited price interval between 17 and 19 cents per pound.
Note: on Friday March/2023 closed out at 18.37 cents per pound, a drop of 47 points against the previous Friday, depreciating a little more than 10 dollars per ton. All the other maturities closed out in the red with drops ranging between 14 and 40 points, equivalent to 3 and 9 dollars per ton.
Inverted markets attract funds for going long. And that’s what happened. They are long more than 77,000 lots according to the CFTC, based on last Tuesday’s position. According to the fundamentalist picture we have, it can be another element that can bring a touch of volatility to the market – as if there wasn’t enough.
You all enjoy your weekend.
To read the previous episodes of World Sugar Market – Weekly Comment, click here
To get in touch with Mr. Arnaldo, write on arnaldo@archerconsulting.com.br
