The closing averages of the current driver contract in New York had a month of September marked mainly by the change of the driver position from October 2019 to March 2020, which eventually led the price level of the driver contract to rise from USD/cents 11.00 to 12.00 only by changing the expiration date from the first to the second screen in New York. Another factor observed in this change was the reduction in the level of participation of India’s subsidies, which, hovering around USD/cents 6.63, ended up accounting for “only” 50% of the screen of the March/20 driver contract in New York, against the level of 65% when the driver contract was October 2019.
Another highlight, but more focused on the Brazilian domestic market, was the fall in the levels of arbitrage premiums for hydrated ethanol (base on Ribeirão Preto) against the New York sugar driver contract. With the margin swings rising from USD/cents 11.00 to 12.00, hydrated ethanol arbitrage premiums fell from an average of 23% to 25% to the range of 12% to 16% in just a week, strongly undermining the high attractiveness of hydrated ethanol sales in the Brazilian physical market when compared to sugar trading prices in New York.
In general, high rollover from October 2019 to March 2020 led to a strong price volatility of these two assets, with March 2020 getting “support” (albeit artificial, driven by short-covering rather than by improvement in sugar market fundamentals) to rise to the level of USD/cents 12.65, from which it has shown difficulty in sustaining gains. In the meantime, looking at market fundamentals, little has changed, with India still without internal control of its production, which is subsidized and scattered amid 35 million small and medium local producers, with high electoral relevance, which causes supply levels from the 2018/19 crop (ended in September 2019) to the 2019/20 crop (started in October 2019) to fall slightly from 33 to 31 million tons.
All this should cause prices in New York to meet their clear limits at the current level of saturation of highs at USD 12.60 or, at best, at 13.00 if no stronger profitability occurs at the level of USD/cents 12.80 in October. Another determining factor in limiting short- and medium-term bullish levels is the low volume of physical deliveries of October 2019, which must range from 700 to 800 thousand tons, quite contrasting with the level of 2.10 million tons of the previous driver contract, July 2019. Weak physical delivery volumes translate into low demand, removing another pillar from price support.
In this context, in September, the average closing price of the March 2020 contract on ICE Futures US was USD/cents 12.14. Compared to the same month of the previous year, there was a 4.46% increase over the average of USD/cents 11.62. In the margin there was a valuation of 4.29% compared to the average of USD/cents 11.64 in August. Broadening the perspective of analysis, we see that the average price of September this year was 16.14% below the average price for this period over the last five years, which currently fluctuates around USD/cents 14.47. In the previous month, current prices had been 14.05% lower than the five-year average for the period of USD/cents 13.54.
As a result, the average price over the last five years between August and September increased 6.89%, while the March/20 price level advanced 4.29% in the margin. Thus, the reading is that there was a widening of the distance between the price level and its historical average, more on the part of the 5-year historical average, which advanced 6.89%, than on the part of March 2020, which also grew, but only 4.29%. For September SAFRAS & Mercado expected prices to be around USD/cents 11.50, which was 5.27% below the effective average price of the period, at USD/cents 12.14. For October SAFRAS & Mercado expects prices to be around USD/cents 12.30, which must mean a 6.72% decline YoY, an advance of 1.35% in the margin, and a 24.06% decline from the average price of the last five years for the same period.