Welcome 2015: What Is Ahead For The Sugar And Alcohol Sectors?

The sugar market in NY closed the week slightly down for March/2015 which closed at 14.95 cents per pound, only 3 points below last week’s closing. The other months closed between 7 and 21 points. The market is in the holiday spirit.

2014 was one of those years a lot of us wish hadn’t ever been. The sugar-alcohol sector suffered a lot with more depressed international prices, with less demand, with both volume and revenue of exports down, with plummeting oil price, with skyrocketing costs and with a debt which is in the neighborhood of R$72 billion today, revenue value estimated by Archer for the 2015/2016 harvest, not to mention the cogeneration.

2015 might see the introduction of some policies which might ease the affliction of the sector. Many economists assure that CIDE should be back, much more due to the government’s need for earning than a Dilma’s declaration of love for the sector. The anhydrous blend in gas should increase from today’s 25% to 27%. In addition, Minas Gerais, second largest fuel consumer of the country, has reduced the tax on ethanol from 19% to 14%, which should brought on more competitiveness for the bio fuel. Today, only São Paulo, Paraná, Goiás, Mato Grosso and Mato Grosso do Sul practice prices below the 70% parity. With Minas Gerais being more competitive, there is a consumption potential of additional 1.2 billion liters a year.

What deserves closer attention is the trajectory of the oil on the foreign market. Should the market continue on this price-melting mood, ethanol (whose production cost is at US$70 a barrel today) will lose its competitiveness, signaling the foreign market that more sugar will be produced, which will make the price curve of the commodity deteriorate further ahead. The model developed by Archer ascertain that the average price of NY sugar for the 2015/2016 harvest should be 15.65 cents per pound, average dollar at 2.7431 putting the average value per ton at about R$980. That’s a good level should it turn out to be true. Now, if oil price goes down any further, ethanol is in for a tough ride.

The value for NY sugar converted into reais per tone FOB Santos, using the exchange closing, has not been that bad this year. 2014 average was R$878 per ton, a little over R$864 per ton in 2013. Dispersion this year has been smaller than that of last year’s, that is, we have had a market with a more restrained volatility. Last September has been the worst month since 2010, with a monthly average of only R$783 per ton. Over the last five years, the lowest monthly average was R$608 a ton in May 2010 and the highest one was R$1,236 in January 2011. The average for the last five years is R$929.

Well, the dollar quoted at 2.658, the lowest we have seen over the last five years, would be equivalent to the futures contract in NY today trading at 10 cents per pound and at 20.27 cents per pound tops. The average (R$929) would be equivalent to 15.23 cents per pound today. We are pretty close to that.

Some interesting data is that if we take each monthly average and compare its correlation to the average of the respective year, we will find out that the worst months to fix, that is, those whose price average will certainly be further away from the yearly average, have been May, November and December. Now, the months whose average better represent the yearly average and, therefore, are more likely to have a better performance, are March, July and October.

The total amount of sugar contracts traded at the NY Exchange in 2013 was 29.8 million. We estimate that we will close 2014 at 29.2 million contracts, a 2% reduction in the volume in relation to last year. We are facing some hard times.

Brazilian sugar exports reached in the accumulated over twelve months, from December 2013 to November 2014, a total of 24,220,878 tons, an 11.2% decrease in relation to the same period last year. This is the lowest accumulated volume over the past twelve months. Exports have earned the country US$9.6 billion, with average price at US$396.67 per ton. The revenue has been the lowest since April, 2010.

For ethanol, the accumulated exports for twelve months add up to 1.36 billion liters, a 58% drop compared to the same period last year and the lowest accumulated volume for the last ten years. Never before has so little ethanol been exported. Export revenue of the product has accumulated US$881 million over these past twelve months, the lowest since June, 2006.

The last reports by the Commitment of Traders (which lists the open contracts for markets where 20 or more operators have the same or superior positions to the limits set by the CFTC itself) show that the short position of the speculators on the sugar market is huge, close to a historical record. After the falls over the last weeks, the market has been extremely oversold. Samuel Levy, from Suporte & Resistência, thinks that over the next days before the Holidays, the volume will be low and the liquidity on the market really reduced. A movement of profit taking on the part of hedge funds may surprise us resulting in a sharp high of quotations, which can reach about 15.80-16 cents per pound. At the present exchange rate, this can be an excellent opportunity to fix March at about R$950 per ton.

I would like to wish all our clients, readers, suppliers and collaborators a Merry Christmas and a Prosperous 2015. Thank you so much for all your support. In 2014, Archer Consulting (www.archerconsulting.com.br) site hits came to 47,529, a 90.62% increase compared to the previous year. In addition to Brazil, we have had accesses from the USA, Italy, Thailand, India, Colombia, Portugal, Kazakhstan and other 100 countries. In Brazil, São Paulo comes in first access-wise, followed by Rio de Janeiro, Belo Horizonte and Ribeirão Preto. Brasilia has been the city whose hits grew the most compared to last year’s - more than 400%.