World Sugar Market – Weekly Comment – Episode 52

A shot in the dark

Dear readers,
I want to start this out by letting you know firsthand about my price forecast for the sugar futures contract in NY until the end of 2023. I’m sure you can make a lot of money off of this infallible, exclusive and totally free tip. But, of course, if you lose money on it, that’s totally on you. And there’s no point complaining later, because the disclosure at the bottom of the page is pretty clear.
Ready?
So, write it down – from today up until the end of 2023, sugar should trade within an interval between 8 and 68 cents per pound. What do you mean? Aren’t you taking me seriously? Do you think it is a joke? Well, it is a joke, but pretty well-grounded one.

I don’t know if you heard about it, but this week two leading international banks came out with this kind of forecast, not for sugar, but for oil. One bank said that under a situation of extreme stress, oil could come to 380 dollars per barrel if Russia decides to cut its production. The other bank warns that if we fall into a recession, at the end of the year oil will hit 65 dollars per barrel and in 2023 it will reach 45 dollars per barrel.

“My forecast” didn’t use any sophisticated algorithm created by bright minds from Cambridge, Stanford, Harvard, MIT or Oxford where these opinion leaders live. It just used the good and old rule of three I learned in math classes at public schools I went to in Santos, basing it on the average sugar price in NY. No, seriously. I don’t know who might be interested in these senseless forecasts, but now and then they pop up to make the most careless investors buy into them. They only add more uncertainties onto an already fragmented scenario full of so many strands.

Just to remember two curious cases that occurred in the recent past: before the 2008 crises, which resulted in the bankruptcy of then robust and infallible financial institutions, one of them said – on a cover story of The Economist whose headline was “The End of Cheap Food” – that oil could come to 230 dollars per barrel. The other, even more hilarious, a manager of a respectful fund in Asia, when the sugar market hit 30 cents per pound, at the end of 2010, stated that the goal now was 75 cents per pound!

The sugar futures market in NY had an invigorating week. The contract expiring in October/2022 closed out Friday at 19.05 cents per pound, increasing almost 100 points over the week (22 dollars per ton). March/2023 went up 81 points (18 dollars per ton). On average, the months that make up the 2023/2024 crop went up 38 points and the 2024/2025 crop went up 14 points on average. The real appreciated a little more than 1% over the week and closed at about R$5.2650 against the dollar.

Some companies contemplate fixing sugar prices for the 2023/2024 crop (which starts in April next year). We estimate that between 22-23% of the estimated volume for export has already been fixed. For 2024/2025, only 3% at most has. Although each company has its specific needs and commitments tied to contracts in the American currency, it’s just natural that some volume needs to be made. However, a large company admits that its fixation is much smaller than the average percentage on the market and justifies that the greatest uncertainty is the production cost. The fright the mills took at the increase in the production cost of the 2021/2022 crop, which ended in March this year, certainly inhibited the fixations for the next crop. “If I don’t even know how much my cost in this 2022/2023 crop will be, let alone in the 2023/2024 crop. For me, it’s a shot in the dark”.

The non-index funds flipped and are now short by 36,000 contracts based on last Tuesday’s position. It’s important to be careful and not get too excited about this week’s high. The commodities might go through a new wave of liquidation once great purchases have been made on the futures markets foreseeing a shortage which didn’t come true right after the start of the war.

Sugar prices might have gone up due to the expectation for a smaller ethanol supply in July, an impact of the tax distortions sponsored by the government. They have put Brazil into a fiscal hole that will be felt by the next government. Had they had a little intellectual capacity and technical knowledge, all this rush tripping over laws and tearing up the Constitution would have been avoided – especially now that the gap between Petrobras and foreign market prices has shortened to just 6%.

While on the subject of the so diametrically opposed forecasts at the start of this text, the decision-making process today, even if we simplify it, has to take into account the probabilities of some of these events (there are others, but let’s stick to these only): a. dollar at R$4.8000 or at R$6.0000; b. oil at US$70 per barrel or at US$140; c. tax change on fuels starting January 1 or no change; d. recession or start of global recovery; e. end of war or its extension; f. Petrobras will resume parity or keep this populist policy; g. crop in the Center-South below 520 billion tons of sugarcane or closer to 535 million tons. If we build a simple matrix with the listed events, we will have more than 2 million different scenarios (prices).

India has just reached – way before the deadline – the 10% goal of ethanol mix in gas under the Ethanol Blended Program (EBP). The country has saved more than US$5.2 billion using ethanol in gas. The 20% goal continues fixed for 2025/2026. That’s positive news for sugar in the long run.

It is with great enthusiasm that we would like to let you all know about the creation of ARCHER EDUCATION, a company focused on the education of agrobusiness professionals aiming to supply a huge demand for knowledge and specialization in the several areas of the agrobusiness. Our main focuses are competitiveness and efficiency. Courses, lectures, workshops and seminars about energy, grains and coffee, contracts and agrobusinesses securities, hedge accounting, hedge for companies, private credit structures, rural insurance, commodities derivative, environment, risk management, valuation, provisions and contingent liabilities market, among other topics of great interest within the agrobusiness universe, will make up the scope of the new company. Luiz Carlos Corrêa Carvalho (ABAG), Luiz Cláudio Caffagni (Sombrero Seguros), Tarcilo Rodrigues (BioAgência) and Arnaldo Luiz Corrêa (Archer Consulting), in addition to a team of superstars in their respective areas, will serve on the Executive Board of the company.

You all have a nice 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

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