The upward movement in international prices occurs even with the proximity of the new 2022/23 crop in Brazil’s Center-South and the graphic formation of a Double Top at the turn of February to March; Petrobras’ new posture must continue to harm sugar and reduce the production mix for ethanol
Early March has been marked by important short-term changes in the price scenario in New York. It is very peculiar to observe that a recent Double Top graphic figure for May/23 in New York is giving way to a Bullish Channel. Historically these Double Top figures have an 85% chance of resulting in a downtrend. This becomes even more evident when we contrast the graphic figure with fundamentals, as the market is less than 30 days from the start of the new 2023/24 crop in the Center-South of Brazil. This crop must have an average growth of 4%, which results in a productive advance of 20 mln tons of cane in the main producing region of the country, which must have its supply increasing from 545 to 565 mln tons.
The downward pressure from the Double Top with the fundamentals of the new crop in Brazil’s Center-South is reinforced by the “solution” adopted by the federal government to reduce gasoline by BRL 0.13 per liter after the return of the taxation of BRL 0.49 per liter on gasoline. The big issue is not the cents involved but the setting of a precedent for the measure that determined a decline in gasoline was adopted without there being a clear demand in relation to international price parity. On the day the decline was announced, calculations by the Brazilian Association of Fuel Importers (Abicom) indicated that domestic prices were fully in line with international prices. This made the political decision involved in the measure more than evident. The precedent-setting was informed by SAFRAS & Mercado on the same day in direct communication with the consultancy clients through daily reports and media interviews.
Two days later, in an interview to the press, the chairman of Petrobras stated that Petrobras sets gasoline prices “as it wants” and that now the state-owned company’s objective is to seek an “internal parity,” explaining the state-owned company’s position to give up the policy of international parity. It was very clear that this decision required a short time to be taken. It soon became more evident that future (and, of course, negative) interventions will be easily taken during the term of the new presidency. With this, it is even latent in the market that the demand for the Pis/Cofins retaxation on gasoline was very expensive for the ethanol sector. Expensive to the point of not effectively offsetting the exchange of a high of just BRL 0.02 per liter of PIS/Cofins on ethanol and a high of BRL 0.49 per liter of gasoline for the return of Petrobras’ price intervention policies for the next 4 years.
With this new perspective on the radar, we have a third bearish vector for sugar prices. This is because ethanol, with its profitability compromised in the long term (the 4 years of the new presidency) tends to be less neglected by mills in the formation of the production mix during the upcoming 2023/24 crop. Therefore, the estimates made between December last year and the end of February this year completely fall to the ground as they do not see as valid such a drastic change in Petrobras’ speech and price policy, as well as such a strong and direct action by the government on the state-run company. Indeed, we can interpret that we are clearly heading toward a storm for the ethanol market, not only in 2023 but also for the next four years. With lower mix indications for ethanol, the sugar production share is larger, renewing downward pressure on commodity prices in New York, which must deepen the negativity of its future price curve this year.
All these downward vectors must be reinforced by the policy for US interest rates in effect since the beginning of last year and which must be sharpened in 2023 with the final US interest rate expected to end 2023 at levels around 6% a year. On the other hand, all these downward vectors for sugar prices are in stark contrast to what is observed in the May/23 contract at the end of the transition week between February and March. Such is the discrepancy that the Double Top gave way to a Bullish Channel, a rare fact to be observed on the market and even rarer when the fundamentals of the new crop of the main world producer are expansionist in terms of volume. What is actually behind this movement is the reinforcement of India’s narrative about the occasional decline in the country’s local production, which must fall from 37 to the range of 33 to 34 mln tons.
Moreover, there are reports in the international press that “dozens” of mills are closing their crushing activities in the main producing states of India in early March, while the local government has reinforced that it will not allow extra export volumes above the current quota of 6.1 mln tons that have already been defined. This set of information from India has helped to support short-term prices and the formation of the previously mentioned Bullish Channel. However, SAFRAS & Mercado warns that as Indian mills keep shipping volumes above the quota, the market will remember that the country still has huge volumes of stocks, starting the crop at 16 mln tons, but ending the season at 7.8 mln tons, indicating a capacity for consumption and disposal of stocks over the season of 8.5 mln tons.
Of course, should the crop failure be confirmed (which is not expected by SAFRAS & Mercado), this could be an excellent opportunity for India to reduce its stocks, which were heading for 20 mln tons until the previous season, even with the expansion of ethanol production from sugar in the country. This indicates that even with the crop failure, India will be able to expand its exports above the quota if international prices remain above 20 cents, which is actually happening. For these reasons, SAFRAS & Mercado maintains its export estimate of 12 mln tons for the country’s 2022/23 crop, up 7% from the 11.2 mln tons exported in the previous season.