Get ready for the best
In a week made shorter by the Thanksgiving holiday in the USA, the sugar futures market in NY closed out Friday with March/2023 at 19.28 cents per pound, a 77-point drop against the previous week’s close, that is, a price reduction of 17 dollars per ton. The futures contracts related to the 2023/2024 crop also showed accumulated drops between 4 and 12 dollars per ton over the week, with the shorter maturities being the ones that devalued the most.
Over the week, the Brazilian currency devalued by about 1% against the dollar, reflecting the bad mood of the Brazilian financial market because of the possible Fernando Haddad’s nomination as Finance Minister of the government taking over the country on January 1. His speech at a lunch with entrepreneurs this Friday did not get anybody excited. That is not surprising since everybody remembers how Haddad is devoid of ideas other than those emanating out of his guru’s head. The level of flattery shown by Fernando Haddad in the 2018 elections was something memorable and amazing, to say the least. As Finance Minister, Haddad will make as much difference to the country as a fern hanging on the wall.
Natural gas is leading the high on the list of commodities this month. As winter approaches, the escalation of the energy crisis in Europe in the next season is taking shape. The huge costs of this dependence on Russia are a long way from a consensus as far as their magnitude is concerned, but it seems there is no doubt that Europe is witnessing the reduction of its geopolitical importance. Natural gas has risen 14% this month. On the other hand, the lockdown threats in China because of another Covid-19 variant upset the market with a deeper recession threat. Hence, this month, the markets of WTI oil (12%), diesel (11%), Brent oil (10%) and gas (7%) have been accumulating losses.
The accumulated crushing numbers published by UNICA point to a sugarcane crushing total of about 532 million tons up until the end of the 2022/2023 crop; that is close to the volume with which the market is working. It is still early to know how much the Center-South will produce next year, though some predictions point to 575 million tons.
Despite our negative view about the sugar market in the short term due to: a) the funds buying futures without solid fundamentals that justify this movement; b) the Indian default being less relevant than what was commented on the market; c) India being interested in taking advantage of the NY good prices for March and May/2023 and maybe dumping from 8 to 10 million tons of sugar on the international market; d) the threat of a worse recession if the incidence of the new variant of the Covid-19 virus becomes frightening; e) higher interest and inflation rates which curb inventory building, we believe the long-term scenario for the sector is extremely positive, but let’s see why below.
The world sugar demand today must be around 179 million tons, against a production of 182.9 million tons. If we smooth the curve of production growth and of consumption over the last 10-15 years basing it on the numbers of the USDA we see that the production grows at a rate of 0.28% per year while the consumption grows at 0.76% per year. Despite this small advantage in favor of consumption, if both rates stay unchanged over the next years, the world will continue to produce a surplus – albeit smaller – until 2026.
It turns out that the expansion of per capita sugar consumption in Asia is worthy of note. Sugar consumption in Indonesia, for instance, has grown 766 grams per capita on average over the last ten years. It is as though every Indonesian added the consumption of a can of soda to his diet every 12 days every year. Pakistan, on the other hand, has grown 309 grams per capita over the last 10 years. Simply put, it is an additional can of soda every 30 days.
World sugar consumption, except for China, is 25 kilos per capita/year. These two countries mentioned add up to about 520 million inhabitants and continue growing; however, their consumption is close to that of the world average. That is, there is huge room for consumption growth (processed food and beverages) while their economies keep a healthy growth rate. Just for you to have an idea, the Indonesian GDP should grow 5.0% this year, while Pakistan should reach 6.2%.
The probable scenario we are drawing for the next five years foresees a consumption growth of about 1.14% per year, which would create a deficit starting now in 2025 if production does not resume the same pace.
The additional sugar which will be consumed over these five years, based on the initial number of 179 million tons mentioned above, is 13 million tons of sugar. Two thirds of this consumption will be supplied within the countries themselves, while 1/3 must be imported from those countries that produce more than they consume. That is, the free world (the one that imports and exports sugar) will have to provide 10.8 million tons of sugar. Since Brazil is responsible for about 41-45% of this volume, our share is 4.6 million tons of sugar. But that – our dear readers will say – is a piece of cake for Brazil, right?
A volume of 4.6 million tons of sugar might not be something significant. Nevertheless, there are some pieces missing so that this analysis is complete. It is not just export sugar. Sugarcane expansion will have to happen to meet that dammed Otto cycle consumption that will recover sometime and return to pre-pandemic levels. A shorter recession will expand this consumption – remember that the Otto cycle grows a delta above the GDP. The post-war period will surely change Europe’s energy matrix and renewable fuels will play an important role in this shift. How much will this represent for the next years as far as the need for sugarcane is concerned? Five year is just around the corner.
If we are to meet just 4.6 million tons of sugar, we will need only 35 million tons of sugarcane. That’s easy, right? Well, I suggest we look at how much ATR we have produced on average over the last crops: 90 million tons on average over the last five and 88 million tons on average over the last 10. This extra amount represents about 5.5% of all the ATR production, a percentage that goes much beyond the fluctuation we have had. The market will be much more constructive in the next years.
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Up until October 31, 2022, the total volume of fixations for export sugar of the 2023/2024 crop reached 11.76 million tons of sugar at the average price of 17.12 cents per pound without polarization premium, equivalent to 49.0% of the estimated export volume. The average fixation corresponds to R$2,204 per FOB Santos ton, with polarization premium, equivalent to 95.94 cents per pound, with polarization.You all have a good 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
