Twenty Cents is a challenge for 2022/2023
The sugar futures market in NY closed out the week with March/2022 at 19.12 cents per pound, a 58-point fall against last Friday equivalent to 12.80 dollars per ton.
In December accumulated, the market is still positive, though compared to a smaller baseline caused by the fall over the Black Friday week. However, in the yearly accumulated, sugar is ahead by 23%, way below coffee at 83% and also the energy market, which has gone up between 42% (Brent-type oil) and 51% (RBOB gas).
Oil has run out of breath. The Brent type has been dropping for three straight months (monthly average). The fuss fed by the possible recovery of the global economy has died down. So, prognoses about oil being able to hit 100 dollars per barrel at the start of next summer in the Northern Hemisphere have become seriously jeopardized. On the other hand, an important support for hydrous prices (via arbitrage with Petrobras gas), which move the estimated price curve for green fuel for next year downward, has been taken away.
Where has all that bullish enthusiasm gone? The plain truth of the sugar fundamentals (and also of the energy market) is starting to impose itself on the futures market in NY as the supply and demand scenario gets more transparent.
If that is not a reason for the bears, who root for faster falls so they can rebuild their stocks, to rejoice, at least there are signs that sugar prices in NY should stay within a less volatile interval.
I think we can say goodbye to those 20.69 cent per pound seen on November 18. In order for this level to be recovered, the market would need a combination of events that are orbiting around the highly unlikely territory today. That is, it’s safe not to miss out on opportunities to fix prices in real per ton and/or cents per pound – preferably along with the buying of an out-of-the-money call option, at an exercise price 200 points above the market.
The significant improvement on the weather conditions in the sugarcane fields of the Center-South predict a sugarcane crop way above the pessimistic predictions that for some months have been caused by the harmful combination of frosts, droughts and fires. The predictions going around the market for the 2022/2023 crop (which starts next April) in the Center-South are around 560-570 million tons; the North/Northeast should produce between 48-52 million tons.
Brazil will need about 28 billion liters of sugarcane ethanol to meet the domestic and export demands; therefore, there will be enough sugarcane left for the production of 38.5 million tons of sugar, a volume that handily meets the domestic consumption and export. That is, there shouldn’t be a lack of the product in Brazil.
The domestic consumption of sugar has been dropping in line with the technical recession Brazil is facing – smaller income, smaller consumption, or at best, selective consumption. Actually, sugar consumption in Brazil has been dropping steadily since the mid-2010s. In 2010, the total consumption was 11.5 million tons of sugar and the prediction for this crop was 10 million tons (market sources suggest this consumption should be 9.8 million tons). It’s a slowdown of 1.37% per year, but when the population growth is taken into account, the fall in consumption per capita over the same period has been 2.19% per year. That’s not good.
India should move forward with the export volume way beyond 3.5 million tons that have already been contracted and fixed for this crop year (which for them started in October/2021), subsidy-free. Regardless of aiming at prices above 20 cents per pound to go on with the export business deals, the fact is that positive return on sugar over the year and more competitive prices for ethanol domestic trading should not discourage the country to keep exporting sugar. In short, we shouldn’t have a lack of sugar in the world.
Speaking of India, the World Trade Organization (WTO) gave its assent to Brazil, Guatemala and Australia, coming to the conclusion that Indian policy exceeded the limits of the agreement on WTO agriculture as well as the country’s subsidies to sugar export. There will always be loopholes in these agreements and pecuniary penalties seldom occur. It takes years before the demands take effect and when the organization finally addresses the problem, the subsidies are no longer needed. India immediately took a legal action with the WTO in order to protect its producers’ interests arguing that its domestic policy is consistent with the terms of the WTO agreement. I don’t know I will still be alive by the time this dispute gets worked out.
The other day I saw a documentary about the Apollo Project, which was a program coordinated by NASA, at the adjusted cost of US$160 billion, to take the first man to the moon. Neil Armstrong was the chosen astronaut for the Apollo XI mission (“a small step for a man, a giant leap for mankind”, was his lapidary line when he stepped on moon soil). Why him? Legend has it that Armstrong had a vital quality for the Apollo XI mission: he never panicked, not matter what. And he had already been in several accidents. His coldness when dealing with stressful situations put him on the top of the list of applicants. That’s what we will need in 2022 when it comes to elaborating and executing risk policy: no panic.
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A presidential election year is a natural stimulant for the market volatility. Through most of 2022 the investors will be watching the polls and the political events which can define who will sit in the presidential chair in 2023. The major candidates will only be defined after the campaign kickoff in April. Recent surveys only show spontaneous responses which usually differ from the effective results of the ballots. Four years ago, the polls also put Lula first, followed by Marina and then Bolsonaro. The third runner-up ended up being elected after 11 months. It will be a different dynamic after April.
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This is the last comment of the year. We wish you a Merry Christmas and a prosperous New Year, with lots of peace, joy, happy moments and health. Wishing 2023 can be a year of moral, spiritual and material growth to everybody. We will be back in the first week of February. See you then!
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
