Ethanol calls the Shots
The sugar futures market in NY closed out Friday at 19.34 cents per pound for May/2022, a 27-point drop, almost 6 dollars per ton, in the weekly accumulated.
The Brazilian currency once again closed out the week stronger against the dollar, hitting R$4,6560, the lowest level since March/2020. With this real recovery, the sugar values in NY converted into the Brazilian currency dropped R$64 per ton on the average of the closings of the crop that is starting now, and half of this value for the two next crops.
Two-thirds of the mills of the Center-South should start the crop in the second half of April. Uncertainties about sugar availability hold back the May/July spread, which is trading at a premium of 4 dollars per ton.
The non-index funds, according to COT based on last Tuesday’s position, continue long by 97,550 contracts. They gone up 2,655 lots over the week.
The year’s first quarter closed out with energy commodities leading the high trends: natural gas at the top with 53%, followed by heating oil with 49%, gas with 42%, Brent (which is used as reference by Petrobras) with 34%, WTI with 32%. Then there were grains with 28%, corn with 24%, soybean with 18% and at the bottom of the list sugar with 2% and coffee with 1%.
The above fluctuations are strong enough to support a possible change in the pro-ethanol mix which we are forecasting for the 2022/2023 crop that is starting now. This change in the mix just won’t be more significant because the mills are committed to/fixed at 20 million tons at least of export sugar this year.
Sugar and ethanol fundamentals tip positively to the latter. As long as there are doubts about how the world energy matrix will behave after the Russia war is over, oil will find support around US$100 per barrel (now it’s below that after Biden ordered the release of oil reserves).
The real will continue appreciating as long as short-term money of foreign investors is coming in to purchase cheap stocks. However, it doesn’t seem reasonable to think that this appreciation will last especially with this year’s presidential election.
Sugar, on the other hand, doesn’t see any obstacle as long as the global supply goes. India, Brazil and Thailand will put enough volume on the market for a smaller demand in a world affected by inflation, depletion of family income and discouragement of stock building of food industries.
So, since their tendency now is to work hand mouth, everything leads us to believe that the sugar curve price will be in carry.
Hydrous ethanol is trading at premium over sugar in NY at 150 points (!!!) due to the dollar drop against the real. However, with hydrous at R$4.100 per liter with taxes, B3 is pretty out of step – by at least R$150-200 per m³.
Adriano Pires’ appointment as president of Petrobras surely took the market by surprise. A nice surprise this time around. Pires has a PhD in Industrial Economics from the University of Paris, is one the greatest authorities on the market in the country, has worked at ANP (Oil National Agency) and his name was a constant on the list of possible ministers for the Mines and Energy Ministry.
Just three weeks ago, Pires stated in an article published by the press that fuel price control is a shot in the foot. He warned that the discussion about fuel prices cannot be like a local derby, where you decide to be against or for Petrobras respecting the international parity.
In a couple of seminars I got to participate in and where he was a panelist, Adriano Pires always made his liberal viewpoint clear, even though he has recently admitted that in stressful situations (such as the Russian invasion of Ukraine) a fund could be created to mitigate price volatility. This money would come not from the treasury but from profitable dividends distributed by Petrobras to its shareholders, the greatest one being the Government.
The price difference in relation to the world market, as Pires says in the same article, causes two serious problems: the first one is that if the companies that bought Petrobras refineries in Bahia and in Manaus have to practice prices below those of the foreign market, they will lose money in the operation and, consequently, export their production for the fair market value. The second one is that price differences usually end up in shortage. Not having gas to buy is worse than paying a high price for it.
Unless he wants to destroy a reputation built during a distinguished career of more than 30 years on the energy market, Pires will do exactly what his predecessor used to, but he won’t make the same mistake. Price adjustments will have to be faster in order to keep distortions between the foreign price and the one practiced by the company at the refinery from adding up and make Petrobras adjust heavily like it did recently and caused Joaquim Silva e Luna’s ousting after he had been in the office for less than a year.
Pires was a good name so that the president in campaign hushes up the corruption scandal that is hitting the Ministry of Education and makes the media focus on another issue. But he shouldn’t hold his breath on price policy changing.
Adriano Pires knows pretty well that the company he will preside over has to render account to its shareholders here and abroad. Pires is a professional who isn’t used to listening to union leaders and populist politicians’ idle talk after PT robbed the company and, which just during the term of a dimwit called Dilma, led it to a loss of more than unprecedented R$40 billion.
In addition, fuel pricing policy used to favor the car industry with Tax free cars, vehicle financing in 84 months and cheap gas at the expense of tax payers, resulted in a loss of more than R$100 million due to the price suppression administered by the PT group.
Today there are internal procedures that keep its administrators from having reckless management. That stops them from importing gas at a higher price than the sale price on the domestic market, for example.
It remains to be seen how Brasilia will behave when it sees the continuation of a correct policy in line with the best market practices, but which the president frowns upon. It’s worth remembering, however, that – as the counselor to a great sector company told me – “in Brazil today, tomorrow is long term”.
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
