The Turning Point Might Be On Its Way For Sugar

The sugar market in NY closed at a sharp fall in the week with March/2015 expiring at 13.93 cents per pound, a 46-point negative variation in the week equivalent to over 10 dollars per ton.

The physical market showed all its fragility reflected on a one-million-ton delivery against the futures contract maturity. Huge deliveries of any commodity on a futures contract usually reflect the desolation of the physical market when sellers can’t find a safe haven other than delivery in the exchange. Since the rules for the exchange contract allow the buyer to present the ship at the port of shipment until 75 days after the futures contract maturity, let’s keep an eye on the ship nomination to be made by the buyers. The longer they take to do that, the greater the perception that the world doesn’t need sugar. If they speed up the nomination, this reflects on the physical market (via premium), spread and futures – communicating vessels.

Times are difficult for the sector, which is witnessing yet another mill filling bankruptcy early this year and is nervously watching the futures contract in NY trade at the lowest quotation since September 2014, when the market traded at 13.70 cents per pound. However, the pressure that occurred this week, according to some traders, can be duly attributed to the late mills which fixed their sugar export contracts at the last minute, accelerating the devaluation of the commodity.

We always try to analyze the values in reals per ton, since it is the parameter usually used by the mills. At this point, even with the negative closing seen this Friday, the corresponding value was R$912 FOB Santos per ton. Let me repeat part of the comment I made in early February: “I’d rather stick to the values traded in reals per ton which is the point a lot of companies of the sector base themselves on. The fixing average for 2015/2016 is R$971 per ton. The lowest value seen was R$880 per ton. Let’s imagine the worst scenario with the dollar at 3.000 due to an eventual worsening of the political scene. This makes NY equivalent to 12.78 cents per pound in the year”.

We are still above the minimum traded value. Last year, the average was R$880 per ton with the year’s lowest occurring in September, when NY closed at 13.55 cents per pound and the Dollar was worth 2.3286 reals.

Could it be that today’s sugar market is worse off, from the point of view of the market fundamentals? Does it make sense that the world’s sugar surplus has been considerably decreasing over the past two years, the Brazilian production of sugarcane has been stagnant for five years, the insolvency of the sector with a debt equal to 110% of the year’s expected income threatens more mills to shut down, affecting the product supply while the perspectives for further demand of ethanol due to better competitiveness of the product in relation to gas increase, and, yet, prices keep on plummeting? “Ah, this guy, Arnaldo, is incorrigibly bullish,” some might say. But, my point is that we are truly away from the lowest prices, that is, as much as we are living through some turbulence, prices are more constructive.

In 2013, the average closings in NY converted into reals were R$864 per ton. 2014’s average was R$880 per ton. The average in 2015 has been R$920 per ton up to now. Do you get my drift? NY can and will certainly fall even further should the real continue its devaluation against the dollar, which is an exogenous factor more than anything else, and reflects – among other things – the political and economic moment going on in our country. The sugar market might even devaluate even further, for not only bull markets but also bear markets exaggerate. In my opinion, R$800 per ton equivalent is a good indicator.

The arbitrage with the internal ethanol market should allocate more sugarcane to fuel at the start of this harvest, since it is the fastest way for the mills to make money to meet the urgent needs and pay off their bills to suppliers. The foreign market must not have taken this into account yet. The harvest forecasts are coming out of the oven fresh with smaller and smaller numbers. Two weeks ago, Archer released its prediction for the Center-South - 573.7 million tons. This week, an American consulting company came out with its number - 571 million tons.

A market executive, known for his cold blood and extreme pondering, told some interlocutors the market should go through a turning point, which, according to him, should take place in the second semester of this year. Coincidentally, talking to a graphic analyst, he told me just about the same thing with different words. The market can be explosive in the second semester if some steps are fulfilled.

Discussing these turnarounds, concerning these solid market fundamentals (which always prevail), should be a constant in traders’ life. Opportunities usually come up from where we least expect and when everybody else is looking the other way. Can this moment have arrived?

Good weekend and good thinking.