Brazil Report: Under Dilma, Sector Debt Skyrockets

With the dollar hitting 3.2600 reals last Friday, it is only natural that the futures sugar market reacted with a huge devaluation. It makes sense. As we have relentlessly said here that what matters most to capitalized mills with management and governance, is the value per ton in reals. And that has reached levels which are way above the average cost of the production of the mills. If we take into account the NDF, non-deliverable forward, which the mill trades so that its maturity coincides with the shipping of the sugar for export, the gain in even greater. These structured operations contribute to the market’s fall abroad and to the funds’ adding fuel to the fire, boosting the fall. This is going to continue like this. Look at the limit/support as being equivalent to R$800 per ton. The Dilma-Petrobras-Dollar effect is another factor that comes into play.

The closing of the first maturity of the futures sugar contract in NY, May/2015, was 12.70 cents per pound, a 74-point fall in the week, or the equivalent to 16.30 dollars per ton. The exchange rate, however, was trading at 3.2600 reals at the closing of the sugar market. Therefore, the adjustment at the closing is equivalent to R$ 950 per ton. In the previous week, NY and the exchange rate closed at 13.44 cents per pound and 3.0495 reals, or R$940 per ton, respectively. In short, the market closed at a high in reals.

The commodities, in general, have devalued a lot this year. In the accumulated until Friday, coffee has already fallen 23% in 2015. Orange juice has had a 17.5% fall. Oil has had the same percentage and wheat has fallen 14.5%. Sugar closed December/2014 at 14.52 cents per pound; therefore, it has devalued only 12.5%. The real, in turn, has melted 18.5%.

Three weeks ago, we showed here, in the “A Blow Worth Billions” comment, how much the sugar-alcohol sector had lost over the four years of President Dilma Rousseff’s first term. We have come to the immoral and harmful sum of 67.1 billion reals divided between 32.6 billion in the ruinous subsidy supported by the sector’s sweat (PT – Workers’ Party, as we know, loves to be generous with other people’s money) for years, with artificially low gas prices, and R$34.5 billion related to the direct loss in the cash flow of the sector due to the market share loss of ethanol and its equivalent revenue.

At the request of some readers, however, we must include the increase in the sector debt, which we are doing now. Although the management and governance of the mills is limited to their executives, and we all know that there were flight plans that weren’t appropriately calculated by some of them and which benefited the ego of the shareholder rather than an economic-financial planning, the fact is that the government highly messed up the sector providing those who were expanding their activities with tortuous signals.

In March 2012, in a study presented by the Itaú BBA commercial director of sugar and ethanol, Alexandre Figliolino, the debt of the sector reached R$48 billion, “having increased R$5 billion in relation to the previous year”, according to him. Here’s the link. That is, in 2011 the debt was R$43 billion. Today, with the dollar reaching the heights, we estimate that the debt last Friday must have come to R$85.4 billion, which is almost the double.

This is just the damage in one sector of the economy. Evidently, the calculation doesn’t include the thousands of direct and indirect jobs which haven’t been created due to the lack of planning and absence of transparency in fuel pricing, just to mention one point. Five years ago, for example, estimating that ethanol would continue to be the main fuel feeding the increasing fleet of vehicles, we predicted that the Center-South would crush over 700 million tons of sugarcane in 2015/2016, assuming that the investments would occur and that new mills would be built.

Dilma’s incompetence translated into numbers stands out and leaves us all, good and tax-paying citizens, speechless. It would have been a whole lot better for Brazil if the gang that rules the country not only destroying productive and competent sectors but also distorting the ethical values of the society contaminated by the banditry which spreads around Brazilian politics, instead of having read Karl Marx had switched to the Marx Brothers. The outcome would have been funnier and less tragic.