Last week, the NY sugar futures market closed the week with another new low. This time around October 2015 closed Friday’s session at 10.66 cents per pound, driving up the yearly accumulated fall by over 27% and making sugar the most devalued commodity in 2015. Last week’s closing has been the lowest since December 2008.
The evil side of the real devaluation is that it affects the traded price in cents per pound in NY in an inversely proportional way. The correlation seen in July was -0.8432, that is, for each 1% of the dollar appreciation against the real, the price in NY devalues 0.84%. In a way, the value in real per ton obtained by the mill doesn’t change significantly. The regrettable fact, however, brought up by a mill facing financial difficulty, is that it had to make an advance on the exchange contract a few months ago when the dollar was around 2.7000 in order to meet its cost commitments. Only now, when it will load its sugar, was it allowed to fix its commercial contract before a trading company selling NY on the cheap because it doesn’t have any credit limit to fix its price well ahead of time - a double and disastrous setback.
Even more evil than this situation, which further worsens the indebted mills whose amount of debt estimated by Archer might go beyond R$90 billion due to the stronger dollar, is that the real devaluation has a really strong political component since we still haven’t seen the foreign capital going away. The dollar reflects the abysmal incompetence of PT’s Dilma Roussef’s government, a president unable to connect one sentence to another intelligibly, let alone dictate the paths for a complex country such as Brazil, which demands great planning capability, political skill and economy knowledge from its leaders.
We shouldn’t forget that the root of the problem of the sugar-alcohol sector has been the gas price freeze policy imposed by this abominable party since 2005 and which has been slowly eating away the foundations of the sector. With the economic policy, which focused on the rampant consumerism and plentiful credit, adopted by Lula and his troupe, it made sense for the former president to provide people with financing to buy cars and pay them off in up to 84 months, and then cheap gas. The so-called liking some opinion makers thought Lula had for sugar and alcohol (so much as to honor them) would only make sense if we added ice and lemon to them.
The result of Lula and Dilma’s nonsense came later with Petroleo Brasileiro Petrobras' (NYSE:PBR) huge loss (not to mention what the Party’s gang, whose core now meets up in orange jumpsuits, has stolen) and with the deconstruction of the sector. Today, gas in Brazil is still below the foreign market price by 5%. The sector doesn’t realize that it is picking up part of this bill.
In 2013, I wrote an article entitled “Petrobras – the New Venezuela”. Back then, before the corruption scandal, which PT is in over its head, broke out, I commented that “to increase production, Petrobras needs money, something the state-run company didn’t get because of the bleeding caused by the gas import at a price above what it receives. The insecurity on the financial market in relation to the management of the state-run oil company will probably cause a decrease in its rating and an increase in the risk and interest rates to be offered from then on”. It sounds like it has just been written.
Never in the recent past has such a huge political crisis been seen, especially for a government into its eighth month in office only and with just a 7% support of some alienated people or aliens. Maybe the crisis is smaller than we all think it is. Also, never before has such a crisis been seen in the sector. Not even the amazing sugar prices in NY trading at below 5 cents per pound in 1999 are close to what we see today. At that time, the mills’ debt weren’t even close to 30% of the yearly revenue of the companies (those which were doing really badly). We didn’t see mills going bankrupt or stopping crushing. Today, things are way too shaky. What lies ahead for us?
Some banks have reduced the oil price forecast for next year. Patricia Hemsworth, expert on energy market, believes oil (WTI) can top 40 dollars per barrel. That is a sign ethanol might also have a ceiling price.
Archer released early in the week its 3rd Sugarcane Production Estimate in the Center-South for the 2015/2016 harvest. We have kept the previous estimate volume of sugarcane to be crushed (581 million tons), but with a sensible change in amount of ATR per ton due to the smaller yield and the impossibility of our reaching the average ART we had predicted for the whole harvest. We have also changed the mix, reducing sugar availability and increasing ethanol production, in line with the current moment. As a result, we have reduced our sugar production to 29.796 tons (from the previous 32.642) and increased ethanol production to 27.488 cubic meters (from the previous 26.613).
Options volatility is increasing. An operation with straddle at 12.00 cent per pound for March 2016 is trading at 180 points. For those who are bold enough to sell the straddle it means that if the market expires in mid-February/2016 below 12 cents per pound, you are long the equivalent of 10.20 cents per pound. If it expires above 12 cents per pound, you are short the equivalent of 13.80 cents per pound.