The futures sugar market in NY closed the week with little variation in relation to last week along all the price curve. The contract with the closest maturity, October 2015, closed Friday at 2 points over the previous week – 10.68 cents per pound. The other trading months had a one-digit fluctuation only.
The funds are short 87,000 lots, equivalent to 4.4 million tons of sugar and some traders are wondering at what level they will begin taking profit from their positions. How much further the market can fall is the most frequent question. In such troubled political environment Brazil is going through and whose government credibility is close to zero, the exchange rate reflects the insecurity of the foreign investor and affects the sugar quotation. Based on the correlation we have collected over the last 50 days, each 1% of devaluation of the real against the dollar causes a 0.84% fall in the sugar quotation in NY.
Dilma might be at risk of having her mandate suspended if the on-going investigations prove she was given kickback for her election campaign. Brazilians will take to the streets this Sunday, August 16, in a huge popular demonstration against corruption, incompetence, lies and hate speech among social classes caused by the gang that has been in power for twelve years. If you were a fund manager, wouldn’t you rather wait to see how much worse things can get before settling your position? Stress on the dollar will make sugar look for new lows in NY. The ground, in thesis, can be the low in real seen last year, which was R$723 per ton. Can a dollar, supposedly stressed at 3.7500, for example, push NY below 9 cents per pound?
Someone has once said that the market is what happens while everybody is looking around. I met a bright trader a long time ago who used to say that “when everything is bearish, it is bullish”. The paradox explains itself by the argument that when all bad news is already on the market, any breeze might turn into a hurricane. If the funds, sold at this extraordinary volume, decide to repurchase their positions, they can cause an exaggerated quotation increase. But, who said all bad news is already on the market? That’s the point. The political weight has taken on a magnitude never seen before.
Only changes in the fundamentals can bring more high spirits onto the market. For example, who on earth can bear a sugar price below 9 cents per pound and for how long? The production costs in Thailand, whose currency has devalued against the dollar by only 8.5% over the past twelve months, and the production costs in Brazil, which has devalued by 34.7%, are really far apart from each other. While the cost here is around 11.46 cents per FOB pound, in Thailand it is at 15.24 cents per pound.
Another point is that the numbers of the accumulated sugar crushing up until late July published by UNICA should be looked into more carefully if we are to anticipate what the total production of the Center-South can be for the 2015/2016 harvest. Up until the end of last month, the Center-South had crushed 279.37 million tons of sugarcane, producing a total of 343.88 million ATR with an average revenue of 124.86 kilos of ATR per ton of crushed sugarcane. For the last five years, the average ATR over the same period was 127.85. As for the whole harvest, for the past five years we have seen a 136.77 average. On average, crushing as of August shows a better revenue than the accumulated until July – around 17.51 kilos of ATR per ton of crushed sugarcane.
Similarly, over the same period, the crushed sugarcane until late July represented 48.25% of the total in the respective harvest year. Using these parameters and being careful to eliminate the extreme data (lows and highs) out of each one of the cases, we project a 579-million-ton crushing in the Center-South (1.35 larger than last year’s) and a total production of 77.544 million ATR (0.85% smaller than last year’s). If the sugar mix (which is currently at 40.68%) reaches the 41% average, the Center-South will produce 30.3 million tons of sugar and 26.9 billion liters of ethanol. Evidently, we will have to follow this general picture closely to see how plays out.
There are some predictions on the market which go up to 605 million tons. In order to get to this volume of sugarcane, taking into account an average of 2.656 million tons in calendar days, the mills would end crushing on November 30. There can’t be any rainy days until then. If we use the daily crushing average over the last years for August on, which is 2.3 million tons a day, we would drag out crushing until December 19, with no rainy day.
And let’s not forget to mention ethanol. It should have a huge decrease in stocks signaling a price hike for the offseason period.
You all have a wonderful week.