Mills Take Advantage of Stronger Dollar

The NY sugar futures market closed the week practically unchanged, slightly lower in the first expiration month, Oct/13, which closed at 16.34 cents per pound, a loss of only 13 points or 3 dollars per ton. The remaining months closed from unchanged to 11 points lower (2.50 dollars per ton). Nothing interesting happened in the physical market.

Several mills might have already a high percentage of export sales in their books fixed for the next crop (2013/14), well above what could be considered normal for this time of the year. The Archer model for the 2014/14 has not been finalized yet but soon it will be and we will publish our first estimate. However, it is being said in the market that companies more aware of risk management and that possess accounts in international brokerages for hedging operations, may have already fixed between 15 % to 25 % of their projected total volume for next year. This shows two things: a weaker real currency has made companies to protect its commodity, awaiting for further dollar appreciation to do the exchange later, or yet in a less risky operation, they have done a NDF (term contract with future liquidation) with expirations coinciding with the futures market ones. The return, as we have commented here, has been good. Using the average closing for the 2014/15 months (May, Jul and Oct 2014 plus mar 2015) with the dollar curve, we have an average of R$ 42.24 per bag ex-mill. The better and more efficient mills have production costs near the R$ 30/bag ex-mill.

What is still detached from the exports price is the internal sugar market, which should be closer to NY in an upward trend. The correlation between the two markets (NY and ESALQ) is small. In this harvest, the adherence coefficient (the closer to 1 the greater the adherence) is 0.4355, which is really bad. The figure has been 0.8975 in the past, in the period of May/10 to May/11. With more anhydrous being produced, the white sugar market internally should be affected and this will reflect on internal prices.

Paradoxically, in a market where international prices continue to fall in cents per pound terms, the mills are happy with a stronger dollar that improves their export sales fixations, resulting in more reals per ton. We reached the peak in real terms two weeks ago, R$ 929 per ton, above the average for the year, R$ 838.56 per ton and of the average for the crop year (April onwards) at R$ 834.84 per ton.

The sugar exports from Brazil totaled 28.447.728 tons in the 12 months accumulated, Aug/12 to Jul/13, earning US$ 13.66 billion dollars at an average price of 480.19 dollars per ton. The ethanol exports 12 months accumulated reached 3.48 billion liters, totaling US$ 2.343 billion. The accumulated volume of sugar in the 12 months is one of the biggest in history.

UNICA divulged last week the crushing numbers for the Center South up to the 2nd half of August, 315.1 million tons. If we did the same calculation as done before here, taking as basis the accumulated percentage of the last 5 harvests for the same period, we have an average of 54.39 % of the corresponding harvest, with the highest occurring in 2010/11 (60.70 %) and the lowest in 2008/09 (48.39 %). If we take out the extreme values, and apply the estimate for crushing in this harvest, we get to 580 million tons. The Archer estimate published on June 4th was 578 million tons.

The non-indexed funds have increased their shorts. Now they have 60.000 lots sold, an equivalent of 3 million tons. Meantime, the options volatility trades at unbelievable 16.4 % annualized. For the reader to have an idea of what this means, the average volatility in the market last two years has been 26 %. In order to protect against the market variations for 3 months, using the exercise price closest to the market (at the money option) the premium cost on average 20 dollars per ton. Today it costs 13 dollars per ton. It is evident that the mills that use options to aggregate value to their price fixations now lose value with lower volatility. On the other hand, the industrial consumers have an excellent opportunity to buy price insurance.

Once more, the Rabobank promoted its annual Seminar on sugar and ethanol (15th edition). Without a doubt, this has become a “can’t miss” event. We had speakers of the highest caliber and appropriate themes for the market. That bank believes that next year (Oct/13 to Sep/14) the sugar price in the international markets should be between the 15.50 and 17.50 cents per pound levels. We should remember that in lat year’s Seminar, the bank forecast was for an average price of 19 cents per pound for the same period, which with the dollar exchange then, corresponded to R$ 917.20 per ton FOB equivalent (our calculation). The effective value ended up being R$ 863.00, turning out to be a correct forecast, with a less than 6 % error. A humorous moment during the event occurred when someone asked an executive from the bank about what is going to take for the market to reach the 30 cents per pound level again. The response was “only if every Chinese person were to drink a Coca-Cola bottle with real sugar in its formula, and not HFCS”. This will be the only way for sure.

Last Thursday, seven projects for the supply of energy generated via biomass were given the OK by the Electrical Energy Commercialization Committee to guarantee the supply of the electric grid, beginning on Jan 1st 2018. The average price traded at the auction was R$ 135.58 per megawatt/hour for a total of 324 MW.

The minister of Economy, Guido Mantega, declared that “the worst of the crisis is over”. This means the following: the situation of the economy will worsen even further. A country that has ministers of the economy of the caliber of Delfim Neto, Roberto Campos, Pedro Malan and Mario Henrique Simonsen, now have a Mantega, it is the same as a team which used to have Pele as its main player only to be playing now with a nameless John Doe. God help us.

Make note on your agenda: Archer Consulting promotes on Nov 26th, 27th and 28th a Course on Logistics in Commodities. It will take place in Sao Paulo at the Hotel Central Park Jardins, from 700 pm to 1030 pm. For more information please email priscilla@archerconsulting.com.