Searching For Investors: The Sugar Market

There were some businesses on the sugar physical market for exports at the end of this harvest and also a good volume for next year’s harvest. It wasn’t anything special – about 50,000 tons. Businesses for December shipment were done with a 75-point discount showing that these are hard times, that is, demand is still really small.

Because March/2015 in NY closed this Friday at 16.11 cents per pound, it means that sugar for December shipment has been traded lower than the cost of production, which, according to our model, is 15.70 cents per pound Santos FOB, representing a loss close to US$7.50 per ton based on the average cost of production of the mills. Sugar for the internal market carries a better return, followed by anhydrous and hydrous.

The week has been a little better for sugar on the futures market. NY had a 6-to-27 point high, that is, a 1.50-to-6 dollar gain per ton in the week. Those who managed to take advantage of the dollar spikes against the real and make non-deliverable currency forward contracts, the so-called NDFs, got fixations in reals per ton well above what has been seen over the last 2-3 years. However, because of the probable definition of the Ministry of Finance, the dollar has dropped to 2.5220 this Friday.

At present value adjusted by BC interest rates, fixation for March/2016 (the end of the 2015/2016 harvest) is still above R$1,000 per ton. This seems to be a good fixation alternative for the mills since any spasm on the sugar market in NY for fundamentalist reasons will have a much larger impact on months with shorter maturity than on months with longer maturity. The average fixation values for 2015/2016 at present value are about R$950 per ton FOB equivalent.

The spread for March/May 2015 has opened a little more and is traded at 36 points, pointing to a 14.15% carry a year.

According to the model developed by Archer Consulting, the volume fixed by the mills for the 2015/2016 harvest is 4.87 million tons until October 31, 2014 - an average price of 17.91 cents per pound. The value represents R$968.66 per ton Santos FOB, with the average dollar at 2.3579. Compared to the same previous harvest period there has been a decrease in the fixed volume. Last year we had more than 6.6 million of fixed tons at an average price of 17.70 cents per pound, with the average dollar at 2.2802, or R$925.82 per ton.

The assumed values for fuel consumption growth in the country, being very conservative, that is, using an annual growth rate of only 2% compared to nothing short of 7.36%, which was the average seen over the last 5 years, Brazil will have to crush until 2019/2020 an additional amount of 142 million tons of sugarcane. How can we draw more investments which should add up to almost US$25 billion when there is a lack of credibility of this present government?

In spite of the recent price increase, gas at the pump continues to lag according to the calculations by Archer. The fair gas price at the pump is R$3.194 per liter, that is, above the average value in the Southeast in the week of 9 to November 15 which was R$2.965 per liter. Petrobras would have to raise prices by 10% at the refinery.

This week’s Veja magazine cover story shows an exclusive e-mail sent to Dilma by Petrobras ex- director Paulo Roberto Costa in 2009 which points out that she and Lula ignored the warnings about irregularities at Petrobras work sites and which now are under investigation by the Federal Police. The quagmire only gets worse every day.