Tensions and upheaval for all tastes
The sugar futures market in NY showed a low performance over the week and closed out Friday’s session with March/2023 at 17.58 cents per pound, a significantly accumulated drop of 80 points in the week, equivalent to almost 18 dollars per ton.
We have commented here that sugar would have great difficulty going back to the 19-cent-per-pound level, but it could find support around 17 cents per pound. However, the continuous worsening of the global scenario has strongly contributed to the deterioration of the market and made the sugar contract in NY break the 17 cents per pound on the futures contracts of the 2023/2024 Center-South crop (May-July-October/2023 and March/2024).
To make things worse, the presidential election in Brazil, whose second round takes place this Sunday, adds on a component of volatility and distrust on the part of the prospective foreign investors, a reflection of the absolute absence of a solid government plan of both candidates, pushing the real close to R$5.4000
Regardless of the ballot results (which should come out around 9 o’clock Sunday night), there is a consensus that Brazil will have a very difficult year in the economy and politics, with foreseeable tax increases to meet the excessive spending of the federal government this year.
But things aren’t all that bad. It seems like the hydrous has hit rock bottom. Remember that today there is an 18% gap between Petrobras gas price at the refinery and the international market. Though the company claims that in its pricing model it uses a smoothed average of international prices being careful not to contaminate the value with the volatility of the real against the dollar, the chances of readjustment as soon as the election has been decided seem pretty high. That can be the good news.
If we have a gas price adjustment and the return of the federal taxes in the first quarter of 2023, hydrous should come close to the sugar price. In our August 26 comment, we said that by-products of a commodity tend to have balanced prices, and the difference between hydrous and sugar had hit 450 points. Our advice was to sell sugar in NY and buy hydrous in B3. The difference narrowed to 150 points. Those who dispassionately analyzed the market pocketed US$66 per ton.
The geopolitical tensions and economic upheavals coming from China and Europe make up the backdrop for a 2023 full of uncertainties and surprises. Brazil will need to do its homework so as not to wallow even further in the disproportionate polarization that has not contributed whatsoever to the solution of distressing problems afflicting the country. It will take a lot of effort to carry the country to a productive arrangement between the Executive and the Congress in order to face the difficult period ahead of us. Brazil’s greatest problem remains being the low quality of our political class and its shameful lack of commitment to the future of the country.
The last UNICA number showed an accumulated crushing in the first two weeks of October of 458.7 million tons of sugarcane. This is the smallest accumulated number since the 2012/2013 crop. The accumulated crushed total so far has represented 87.6% of the final crop, if we take the last 5 years, or 85.4% of the last 8 years. In a simplistic projection, the final volume for the current crop would be between 523 and 537 million tons of sugarcane.
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The model developed by Archer Consulting estimates that the mills’ pricing for the 2023/2024 crop in September/2022 was 1,943,000 tons of sugar at the average equivalent price of R$2,162 per FOB ton. This has been the greatest monthly volume registered of this crop. We believe this acceleration was encouraged by hydrous low prices and the increase in sugar production for this crop due to the mix change.
Cumulatively, up until September 30, the total fixed volume for the 2023/2024 crop reached 9.36 million tons of sugar at the average price of 17.31 cents per pound without polarization premium. The fixation corresponds to R$2,224 per FOB Santos ton, with equivalent polarization premium at 96.82 cents per pound, with polarization. The average quotation of the real in September/2022 was R$5.2357.
In the NY exchange, the volume of sugar futures contracts in September was a record for the crop: 3.82 million contracts traded during the month, showing a significant expansion of 161% against the volume traded in August.
You all enjoy a nice rest and have a good election day.
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
