Last year, we started the year by suggesting that those looking at the Brazilian sugar market may want to fasten their seat belts because the volatility came back into the market due to a number of factors including elections and fluctuations in the real’s value against the dollar, among others. As we look at the outlook for 2020, some of the same factors are at play – along with some new nuances just to keep you on your toes.
There are several reasons to expect that volatility will continue in 2020.
#1: Politics matter. The elections in Brazil are over, but political instability, paired with currency fluctuation and a continued weak real against the dollar, has a big impact on the economy. In another part of the world, elections in India were important in 2019 due to the subsidies provided to cane growers and the impact that has on the world sugar supply. Additionally, global trade wars and events like the drone attack in Saudi Arabia have macro impacts on the market – primarily on the crude oil prices – which in turn affects millers.
#2: The weather. Weather is always a factor and will play a large role in the world’s production of sugar cane and sugar beets. We expect the 2020/2021 crushed sugar cane to remain roughly unchanged, but the weather could impact that. For example, Thailand production was recently impacted by a weather event.
#3: Ethanol mix. High prices enabled a record mix of ethanol in Brazil – around 10 million tons less sugar was available for export. As discussed last year, high ethanol demand and weather-driven supply limitations could push prices up. This could also go the other way if global oil prices go down, which could incentive some mills to switch production back to sugar. Additionally, ethanol is denominated in reais, while sugar is done in dollars – meaning the foreign exchange rate will continue to have an impact.
As always there are many variables that could affect the sugar market to either side. With that in mind, now is the time for mills to look at the things they have control over – which could include implementing a risk management strategy that helps protect margins.
Uncertainty is still in the air
Price is king, and the futures prices for sugar are rising. Brazil is at the epicenter of sugar, so we will continue to learn more as we approach the key season in the Center-South. At this point, sugar mix estimates in Brazil are starting to rise, but as we already noted, politics and weather could have an impact. Another point to consider, a recent survey by Platts said 35% (10 million metric tons) of the 2020/2021 Brazilian sugar crop was fixed in November, allowing producers to lock in margins for export. This also means they will need a mix of at least 35% to meet their volume obligations.
Producers always want to lock in the best price possible. One key to success will be producers’ ability to lock in margin in the futures market or buy flexibility to allow them to shift strategies based on what happens in the market. There have been significant fund position and swings from record short positions.
With the uncertainty in front of the market, a conservative hedging approach may be best to preserve a floor price and protect margins. This would help ensure vital cash flow needed to run operations.
Debt levels – and their currency denomination – will play a role in your strategy, too. For instance, mills with debt or operating costs in reals could benefit from certain structured products that hedge against both the price of crude oil and the foreign exchange rate with the dollar.
No matter your situation – including your allocation of production between ethanol and sugar –2020 is likely to throw more volatility and unpredictable variables your way.
Hopefully, you had your seat belts securely fashioned in 2019, and you keep it buckled for 2020. Just like that seat belt protects you in a car, you need a risk management strategy that can support your business when the outlook is uncertain.