Worrisome Distortions
NY closed out the week with the sugar futures contract for October/2022 at 18.46 cents per pound, a 37-point increase (equivalent to 8 dollars per ton) against the previous week. The week’s high was possibly fed by the short covering by the funds on the part of their speculative position they have or might have zeroed out over the week. If that’s the case, what can boost NY from now on in view of this stagnation on the market? Over the last 20 days, the volume in NY has been below 90,000 daily contracts. The year’s daily average is 128,000 contracts.
The sugar physical market continues in demand, especially VHP. According to an experienced physical broker, sugar for shipment in October finds few sellers. Behind this demand is the white premium (the difference between refined and raw sugar) that is trading above 150 dollars per ton. Well, imagine the major refineries of the planet running after raw sugar to take advantage of the excellent premiums the market is pointing to. That’s exactly why the basis (premium paid for the physical sugar over the value traded on the futures market) appreciates, because the buyer wants the product right away. For him [buyer, refinery] it doesn’t do any good to buy sugar futures contracts in NY to receive the physical sugar because its expiration takes place at the end of September and until then the market conditions can be different.
Smaller availability than the expected of export sugar in Thailand, adverse conditions in logistics and heavy demurrage due to delays in sugar delivery contribute to a positive scenario for the market, at least until the arrival of the Indian crop which, according to sources in that country, “will be as good as it was this year”.
Hydrous continues going through a sharp price fall having melted 12% in just four weeks. The weekly indicator published by ESALQ points to a 350-point discount of the fuel against sugar in NY, even taking into consideration the CBIO in the equation. Markets don’t usually support a distortion this big for a long time. Either hydrous adjusts (going up) or NY will have to fall in order for this difference to narrow.
However, it’s clear we are living in a troubled period in terms of pricing. Huge doubts hover over the mills as to what the federal tax on fuels will be as of January/2023. I’m afraid worse fuel prices will cause a change in the production mix favoring sugar and, therefore, affecting prices.
The counterpoint is that hydrous traded at R$2.7000 per liter with taxes, as seen this week, is equivalent to sugar at 15 cents per pound, which is below the production cost if we take into consideration amortization, depreciation, financial cost, among other expenses. It doesn’t seem to be consistent. Scholars will say that the production cost of the crop that is being crushed has no interference on the trajectory of the prices, because the producer will need to sell anyway. They are right. However, less margin and market coming up on the production cost usually impact caution with plantation and renewal in the next crop. And that’s where the low-price effect starts to count.
The crushing number published by UNICA shows an accumulated total of 322.0 million tons of crushed sugarcane until the first two weeks of August. This period, if we look at the last ten years, represented 58.6% on average of the total crushed over the year. If we take the last six years, it represented 61%. Simply put, this shows that the total crushing should stay around 535 tons of sugarcane (maximum: 542 and minimum: 528).
Here’s something curious about the sugar market. Up until now, April/2022 has shown the highest monthly price average of the year: 19.65 cents per pound. This has never happened in this century, and we have never had the highest monthly price average over the period running from April to July either. So that this fact doesn’t take place, the next months would have to trade above 19-20 cents per pound again. Do you believer that’ll happen?
According to a FGV study, the fiscal meltdown created by the current government – with the populist reduction of taxes – seeking reelection will leave a hole of R$430 billion, a deficit estimated at 4.3% of the GDP. It is about all the spending that isn’t covered by the budget. It’s as if you took all the money kept at home in the piggy bank, spent it however you wanted to, and put back a bad check in its place. The bill will come by means of a tax increase. So, it’s unlikely that ethanol will keep the exemption of federal taxes after the start of 2023, regardless of who becomes the president. In Brazil, everything can happen, though.
You all have a great 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
