NY Sugar Market Sees A Steep Fall

The Sugar market in NY had a steep fall for October/2014 this week which closed at 17.04 cents per pound on Friday, or a 75 point-drop (about 16.50 dollars per ton). Taking into account the high that has been reached this month, October/2014 has already fallen 104 points.

What changes have taken place on sugar fundamentals this month to account for such a drop? An executive from the sector answers, ironically, that it is the drought in the cane field that should, according to him, reduce production at his mill by 7-10%. A European trading company has just reduced its sugarcane production estimate for 2014/2015 to 559 million tons. More sugarcane is being designated for ethanol which pays better than sugar. Each percentage point in mix change to ethanol reduces sugar availability by 800 thousand tons. We are looking at two uneven markets: short-term bearish and medium-long-term bullish.

A lot of mills are buying back futures positions hedged at the exchange supported by what is being seen at home. Let’s face it. Hardly ever do we see this kind of strategy. No one takes a step like this (buying back hedges) unless he is relatively sure of what he is watching happen before his eyes. The market plummets because short-term demand is bad, the funds have gotten the timing wrong, that is, they wanted to keep a long position, but the average level for acquiring was high. Many reduced the position (today about 60-70 thousand lots are long positions, but 40-50 thousand have already been sold) because they couldn’t handle the fall. The internal market plummets visibly, which was to be expected for if exports are left unattended, the only way out is to turn to the internal market which ends up succumbing under sales pressure. In short, it looks like a German Panzer has stomped over the sugar market, just like the one that has crumbled the Brazilian Soccer National Team.

Up until May/2014, Brazilian sugar exports over twelve months had reached 25,806,009 tons – a 20.8% drop against the same period last year. Export value went up to US$10.5 billion with the average price at US$408.96 per ton. Ethanol exports, over the same period, reached 2.64 billion liters, with total revenue at a little less than US$1.7 billion.

Over the past 10 years, monthly sugar exports for July, August, September and October cumulatively represented 41 % of the total volume exported in the respective crop year. Over this period, we have already had some small volumes, such as in April/2012 at the start of 2012/2013 harvest when we exported only 548 thousand tons but closed the harvest at nearly 27 million exported tons, unlike exports in October for the same harvest which reached 14.68% of all the volume that year. And the worst performances are all in March, April and May. For eight times in history, monthly sugar exports went beyond 3 million tons from August to November 2010, July and August 2011, October 2012 and August 2013.

Trying to foresee how much the Brazilian volume for sugar export will be this crop year is a dangerous adventure. Look at what happened in 2010 – in May to be more accurate. NY was trading at 13 cents per pound at the beginning of the month and the demand was weak. I find some similarity between 2010 and today. At that time it looked like we were all looking at one direction - market drop - when a series of events such as rain in the countryside, rain at the harbor, desperate return of demand, among others pushed prices up at an overwhelming speed.

But what else can hinder an eventual market recovery? The more ingredients go into a decision-making process, the harder it is to make a decision. I insist on what might happen due to the possible increase in fuel consumption in Brazil and its effect on mix change. Even if consumption increase in 12 months plummets from 8% to 2.5% (the smallest on the 12-month moving accumulated since the 2008 crisis), Brazil would need to grow at least 15-20 million tons of sugarcane. A sharp devaluation of the real currency could make NY fall even farther. Rain that stops crushing, climate factors, election poll, and Dilma’s losing popularity among voters would lead to Petrobras recovery and a possible gas price alignment with the international market favoring ethanol and diminishing sugar availability.

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