The end of March was marked by the occurrence of the “Super Wednesday,” the day on which both the most recent movements in interest rates in the United States and Brazil were decided. These two movements, albeit relatively silent about their effects on the sugar market, have the real power to motivate continuous downward pressure on raw sugar prices in New York in 2023 and 2024, both directly and indirectly. Analyzing the facts from the perspective of interest rates in the United States, we have a greater vector of complexity. This is because there is a “classic” correlation of forces between the hike in interest rates in the United States and the downward influence on the demand curve of sugar. No matter how inelastic it is, negative pressure does exist.
When the Federal Reserve, on March 22, decided to maintain the tone of raising interest rates, even if by 25 basis points, it reaffirmed that it is more concerned over inflation in the United States than the financial viability of the local banking sector. At the beginning of March, the market bets as a whole pointed to an increase of 50 basis points at the meeting on March 22. However, before that, there was the news of the bankruptcy of Silicon Valley Bank and, shortly afterward, came the information about accounting inconsistencies in Credit Suisse’s balance sheets in the years 2019, 2020, and 2022. The purchase of the Swiss bank by its competitor UBS occurred only after the majority shareholders of Credit Suisse stated that they would not provide capital funding, leaving for the central bank of Switzerland the necessary help to keep the bank “floating” even if for a short time.
Next, the Federal Reserve released swap credits to international central banks in the amount of USD 150 bln, a volume much greater than the USD 100 bln released during the subprime crisis in 2007/08. Recently, on March 23, the international risk rating agency Moody’s stated in a report that there is a risk that the banking turmoil in the United States may not be contained. This risk exists even with the rapid action of regulators in the US market, with the stress of the US banking system contaminating other sectors of the economy, triggering greater financial and economic damage than initially anticipated. According to Moody’s, the US authorities may be unable to reduce the current turmoil without severe and lasting repercussions inside and outside the US banking system.
Therefore, the negative impacts of higher interest rates in the United States begin with the cost increase in the dollar, higher prices in the purchase of commodities futures contracts, and reach the flattening of the long-term demand curve of sugar, be it directly, through rising unemployment rates in the country, or indirectly, through the creation of an international crisis scenario that can cause a sell-off scenario in both the stock and derivative market, including agricultural commodities and thereby sugar futures contracts. Recently, the perception that the role of the Fed was to control inflation and not to create a new crisis in the US banking system was common in the market. This type of reading and interpretation of the market was the basis for the total dissatisfaction of agents when the Fed decided to raise interest rates by only 25 basis points rather than by 50 basis points, as expected in early March before the collapse of Silicon Valley Bank and Credit Suisse.
In line with Moody’s warning, these two banks will not be the only ones to fail, given that for those who know the workings of the international financial system well, just a rumor of a crisis in an international investment bank of the size of Credit Suisse would be the enough to trigger a sell-off in the market, which, by miracle, has not yet happened. There is also the loss of the reverse swap operations that the Fed created for the central banks that took part in the credit line of USD 150 bln created last week, since the guarantee is given in the local currency of the borrower, creating an operation already at a loss for local credit-borrowing central banks.
From the perspective of Brazil, the simple maintenance of the Selic rate at 13.75% per year at the most recent Copom meeting ended up worsening the political crisis between the federal government and the Central Bank. This crisis has already been headed by the Finance Minister, who has declared concern about the issue. In general, the political crisis and the maintenance of a high fiscal cost for the government (which has greatly increased spending) end up having repercussions on the exchange rate, with the real to be further depreciated against the dollar over the next few months. The weaker real against the dollar tends to increase the remuneration of Brazilian sugar mills and exporters when currencies are internalized. So, a selling wave is created by Brazil, encouraged by currency devaluation. Therefore, on the part of Brazil, maintaining or increasing interest rates devalues the real against the dollar. The weaker real increases the internal remuneration of exports as well as the supply of Brazilian sugar abroad at a time of intensification of negative pressures from higher US interest rates.
There is also a new ongoing crisis, but on the part of ethanol. The decline in gasoline that occurred with the increase in Pis/Cofins was a movement that was expected not to be isolated. Now this trend has been confirmed with 4% lows in diesel over the week along with statements by the president of Pebrobras that the state-owned company is already seeking “internal parity” and that new adjustments downward in gasoline are yet to come. There are also statements by the minister of the Civil House that the aviation sector tends to lower the prices of airline tickets, but not through direct subsidies, but through the fall in production costs, such as, for example, the decline in fuel prices. Therefore, it is observed that, from several points of view, fuels (see gasoline and diesel) must be used as inflationary containment vectors not only in 2023 but also over the next three years of the new government’s term. This must be reflected in international prices through a reduction in the ethanol mix and an increase in the sugar mix. Indeed, the first quarter of 2023 comes to an end with several storms being observed on the horizon.