THE FOUR ELEMENTS
The sugar futures market in NY closed out the week – made shorter by the holiday in the USA – accumulating a 44-point drop equivalent to 9.70 dollars per ton. July/2024, which expires next Friday, closed out at 18.99 cents per pound, along with October/2024 at 19.17, a 32-point drop in the weekly accumulated, equivalent to 7 dollars per ton.
The July-October/2024 spread widened about 3 dollars per ton, raising comments that the physical delivery on the expiration of July/2024 can be significant. The climate in the Center-South is still the major bullish factor hovering over the market. In the next weeks, it will be crucial to observe not only the climate conditions but also the volume of the physical delivery on the expiration of July/2024 next Friday, the updating of UNICA’s numbers of the biweekly crushing and the behavior of the Brazilian currency against the dollar. These four elements will determine what direction the futures market will take. Besides, possible statements made by President Lula that might affect the political scenario must also be monitored because they have the power to create uncertainties on the financial market. Considering these factors, the next 100 points in NY will probably be upward. Finally, we cannot forget the vulnerability of the position of the funds, whose number this week will only be known on Monday due to the US holiday.
The climate has been and will keep being the determining factor for the price trajectory on the sugar market, causing concern among the mill owners. If hypothetically the last quarter of the sugarcane crop in the Center-South suffers a drop of 25%, together with a decrease of 5% in the ATR, the sugar availability would go down from the predicted 41.7 million tons (according to what Archer Consulting released) to 39.3 million tons, reducing 2.4 million tons of the export market. Though this might seem a little for a country that over the last four years has dumped more than 120 million tons of sugar, the market has already reflected this movement.
Whoever drives through the producing regions of sugarcane in São Paulo and Minas Gerais is impressed by how dry some sugarcane fields are. There’s no telling if they are representative of what is happening to the whole region, but it’s undoubtedly impressive. That’s why some sugarcane crushing forecasts are starting to be reviewed. Even the greatest optimists about the size of the production of the Center-South admit we might have a sudden death and a meaningful break in the last quarter of the crop.
Can a drought in the Center-South and high temperatures in India make the market take an upward turn? Let’s see. As we know, and checked with our contacts in that country, the states of Maharashtra and Karnataka have had good rainfall in April, May and June. These regions account for about 60% to 65% of the sugar production in India. Though the planted area with sugarcane has slightly decreased, the sugarcane production should stay just about the same. In the state of Uttar Pradesh and in the north of India, where there is a heat wave, the effective irrigation provided by the water system of the Ganges River can help minimize the negative impacts.
Up to now, it’s been estimated that the sugar production will stay around 32 to 33 million tons of sugar before the conversion to ethanol. The Indian experts’ expectation that have been consulted is that sugar prices will go up between August and December, with the second half of the Brazilian crop influencing the market over this period. India probably won’t export sugar in 2024/2025, but it won’t have to import either. In the worst-case scenario, the government can reduce the amount of sugar for ethanol production. Of course, that will depend on the import arbitrage of oil versus the international price of sugar.
Although the reports on nighttime TV news here in Brazil get us worried, that fact is that – according to our sources – the temperatures will follow the normal seasonal trends, though they have been 1 to 2 degrees higher than those of last season, reaching the highest levels already registered. The abundance of water for irrigation in the northern region should guarantee that the sugarcane crop won’t be affected.
In the central states, such as Maharashtra and Karnataka, rains before the monsoons have been registered, and the monsoon has arrived in time, keeping the normal conditions. Besides, during the general elections between April and May, there was a significant release of water from the canals, a measure seen as pro-farmer and that benefits the sugarcane areas. Therefore, despite the high temperatures, sugarcane got enough water during the summer, staying green and healthy.
The crop in the Center-South above 605 million tons that we had predicted at first, because of the lack of rain, starts getting jeopardized. The demand and the ethanol price have gotten better, though the gas price practiced by Petrobras continues out of step by about 17%, of which half is due to the devaluation of the Brazilian real. The Brazilian state-owned company has sworn in the eighth president in eight years, who promised in the swearing-in ceremony last week to follow the lines set up by President Lula with his modern ideas and his amazing future vision. That is, a fuel price adjustment before the elections in November just won’t happen.
The Brazilian real is suffering pressure thanks to the stupid things committed by Lula (if he kept his mouth shut for a week, the world would be better). At least the financial market breathed a sigh of relief with the unanimous decision by the Central Bank to keep the interest rate at 10.50%. But don’t worry. Lula will probably get even by appointing as the substitute for the president of the Central Bank some dinosaur that lives in the desert of ideas PT is made up of: Mercadante? Mantega? The next step would be to send the Congress a bill to withdraw the autonomy of the Central Bank. A veteran economist told me that the chance of such aberration getting passed is zero, because “Lula can’t even get a “Happy Birthday to you” passed in the Congress.
Technically, according to our collaborator Marcelo Moreira, the maturity of the options of July/2024 allowed the exercise of about 50,000 puts between the exercise prices from 19 to 26 cents per pound. July/2024 finds resistance at 19.04/19.10/19.62/20.19 cents per pound and resistance at 18.62/18.01 cents per pound. October/2024 shows support at 19.12/19.09/18.53/18.03 cents per pound and resistance at 19.57/20.21 and 20.50 cents per pound.
Again, for those who asked me how they can get the book “Commodities Sem Fronteiras” – they can get it at Livraria Martins Fontes in São Paulo or through the link below. Enjoy your reading.
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
