By Francisco Gomes and Francisco Neto

As we begin 2019, Brazilian sugar markets might be adopting a new motto for the new year: “Fasten your seatbelts”.

We have seen a great deal of volatility come back into the market in recent months. Brazil’s elections drove some of this, combined with corresponding fluctuations in the real’s value against the dollar. Less visible to mills has been the move toward daily pricing of gasoline by Petrobras, which has affected spread prices for sugarcane-based ethanol. Stronger ethanol pricing has pushed many mills to allocate much higher percentages of their production capacity toward ethanol and away from sugar. This has been exacerbated by the very strong crop out of India, which dragged down global sugar prices.

Now we are entering the intercrop period between the harvest in Brazil and the beginning of the crop season for those in other major growing regions for sugarcane and sugar beets. It may seem like the start of a new quiet period to some, but in reality it is likely to be a short stretch of smooth road before a bumpy 2019.

There are several reasons to expect volatility to continue going up after the new year.

First, let’s consider politics. There could continue to be a shakeout domestically as the new administration takes office in Brazil. Significant uncertainty remains as to how government policies will change with regard to agriculture, energy and trade. Yet Brazil is not the only country holding elections. India, the world’s second-largest producer of sugar, also will be holding key elections in April and May, which could impact the world market.

Second, there are questions about the health of upcoming crops, potentially limiting supply after a long period of heavy oversupply relative to demand. Crops of sugarcane in India and sugar beets in Europe are grabbing analysts’ attention. Various reports are stating that the effects of El Nino could be quite impactful, leading trading houses to examine next year’s crop in Brazil, too.

Third, there is the mix between sugar and ethanol within Brazil’s milling industry. Ethanol demand in Brazil is currently breaking all records. This combined with weather-driven supply limitations could force prices upward. Or, with the recent sag in global oil prices, ethanol could be pulled down, incentivizing some mills to switch more production back to sugar. Because ethanol is denominated in reais and sugar in dollars, the foreign exchange rate will have an impact, as well.

In other words, there are many variables that could send the sugar market in either direction. With that in mind, now is the time for mills to look at the things they can control. This includes implementing a risk management strategy that provides needed protection of margins.

 Market signals point to uncertainty

Of course, mills always want to lock in the best price possible. Yet with the uncertainty in front of the market, this might not be the best environment to try and secure every last penny. 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.

Your debt levels – and their currency denomination – will play a role in your strategy, too. For instance, mills with debt or operating costs in reais 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 –2019 is likely to contain more volatility and a number of unpredictable variables coming into play.

Cars have seatbelts for when the unexpected happens. Likewise, a good risk management strategy is essential when volatility is on the horizon. Be safe, and buckle up!

 

By Daniel Hofstad

It is an interesting and volatile time in the European dairy sector. As the European Union (EU) scales back planks of its common agricultural policy (CAP), a new market reality is emerging.

The removal of quotas and other centralized price controls means that Europe is becoming a more liberalized market for dairy. It also is becoming a more volatile one, with pricing in Germany that now regularly diverges from, say, France or the Netherlands.

The potential need for risk management in this unprecedented environment is tremendous. As a point of comparison, Europe is three times the size of the U.S. market in terms of the total volume of physical dairy products. Yet even as it starts to see an increase in the use of risk management tools, the European dairy market is still lagging the U.S. in this regard.

Processors and end users need these solutions in varying ways. Though end users have been driving most of the discussions, producers and processors are beginning to voice urgency around the need for better solutions, as well.

For instance, some futures contracts are simply a blend of the prices being offered in different EU countries, but this price blend may not reflect the real risk to which market participants are exposed. Although futures market liquidity is increasing, new and more sophisticated tools such as OTCs are needed to better manage price risk.

Pricing options to help compete

Cooperatives and some processors may also find themselves at a disadvantage if they are not giving price flexibility to their supply chain partners – that is, the farmers selling to them and the end users buying from them. This, too, can be achieved through risk management solutions and is a large incentive that can help these organizations protect their market share for both buying and selling.

In light of this shifting landscape, here are some questions to ask:

• Would we remain competitive internationally if there was a significant swing in prices in our region?
• Would farmers who sell to us be more likely to sell somewhere else if they were offered additional price protections?
• Likewise, would customers be more likely to sell to us if we could help them capture additional margin in case of a price move?

Looking forward

The good news is that there is plenty of reason for optimism. The European dairy sector is in a similar position to where the U.S. sector was a decade ago. Since then, a robust market has evolved in the U.S. with strong liquidity and price risk management tools that give producers, cooperatives, processors and end users a wide range of options and a high degree of flexibility. Meanwhile, growth in OTC and futures markets have reinforced one another to the whole sector’s benefit.

This could be Europe’s future as well. Cargill Risk Management has experts across the globe who are keeping this potential change on their radar – specifically Sonia Garnier, our dairy expert in Europe. Market participants should begin to plan how they will take advantage of risk management strategies to give themselves increased pricing flexibility so they are more attractive to buying and selling partners. Doing so now could give them an edge in the days ahead.

By Jeremy Barron

Summer flew by. The kids are back in school, late-season scouting is complete and crop tours are in full swing. It’s hard to read the news these days without hearing about ‘bigger than ever’ yield estimates from across the U.S. We’re now just a few weeks away from my favorite time of year, harvest. Many have been focused on production all summer long, surveying several key crop reports. But I’m wondering, how many people have updated their hedging strategy to align will all the information that’s been shared this year? With very accurate estimates of final cost of production, now is the perfect time to re-evaluate marketing and hedging strategies.

I usually recommend that both producers and end-users of commodities use this month as a bench-marking session. It’s a great time to pull out the spreadsheets from January (around the time we were preparing for final yields of the 2017 crop) and compare estimates with where we are today. This is also a good time to ask some questions:

• Are you on track with the revenue or purchasing goals you set back in the winter?
• With updated yield estimates, have you marketed or secured enough grain?
• Do you feel confident in your marketing, purchasing or storage plan for your grain?
• Are you positioned to capture market opportunities?

We recently wrote an article about ‘do nothing strategies’. At Cargill Risk Management, we believe doing nothing at all, is in fact doing something. If you don’t plan and prepare for the year, what will happen to your end-of-year financials if the unexpected occurs? You’d be surprised to see how planning ahead can impact your financial performance for the end of the year.

For producers, adding market participation to those ‘must-sell’ bushels at harvest can be a strategy that can provide opportunity for price movements as well as limiting downside risk. Implementing this can take many forms, including OTC options allowing customization for price risk management.

If you are an end-user of commodities, have you taken advantage of pricing opportunities? If large crops are realized, do you have your needs for the next 6-12 months covered? Revisiting your risk management plan now can pay dividends into the future.

Securing a price through customized risk management products can be a cost-effective way to gain market participation. These tools allow you to participate in future market moves that benefit your position while limiting moves that do not.

Last, it’s important not forget about the 2019 crop, As the harvest begins, you should be thinking about crop plans and pricing strategies to help ensure 2019 is another year filled with success.