Closing averages of the current driver contract in New York in October were marked by advances in the margin and setbacks over the year, in seemingly uneven movements that bring fundamental and statistical issues under each horizon of analysis. The year-on-year decline is nothing more than a statistical load in the wake of higher prices at the same time last year, when the Brazilian crop, with signs of losses, was still able to influence prices in New York, before India raised its subsidies and distorted the foreign market. However, looking at the short term, we can see growth in the margin evolution, i.e. compared to the immediately previous month, which already reflects much more immediate fundamental issues.
This is because the current phase shows that we are in the midst of a supply gap that puts the market between the early end of the crop in South-Central Brazil and the still very early start of India’s new crop that began last month and is not strong enough to meet short-term demand. In Brazil, the crop is less productive and shorter in the face of early July frost, which reduced by 5 tons per hectare the average yield of an area of 140,000 hectares between northern Paraná and southern São Paulo. In addition, we have no clear idea about how much cane has been left to be reaped at the end of this season. However, the central issue is that this end of the season has been marked, for its last three weeks, by frequent rains that, even if not torrential, are thus able to delay the progress of the final phase of the 2019/20 crop of the Center-South, causing many mills to end the season earlier.
Another highlight, more focused on the Brazilian domestic market, was the lack of strength of arbitrage premiums of hydrated ethanol in Ribeirão Preto against the NY sugar driver contract to surpass the level of 20%. With the March/20 margin in New York rising from 12.20 to 12.80 cents, hydrated ethanol arbitrage premiums fell from an average of 20% to 16%. The devaluation of the real against the dollar has further complicated the chances of reaction of arbitrage premiums that still find a stable hydrated ethanol in cane-producing regions.
In this context, in October, the average closing price of the March/20 contract on the New York Stock Exchange was 12.46 cents. Compared to the same month of the previous year, there was a 5.52% decrease from the average of 13.19 cents. In the margin there was a valuation of 2.65% when compared to the average of 12.14 cents in August. Broadening the perspective of analysis, we see that the average price of October this year was 19.08% below the average price for this period over the last five years, which is currently around 15.39 cents. In the previous month current prices had been 16.14% lower than the average of the last five years for the period, which had hitherto fluctuated around 14.47 cents.
As a result, the average price over the last five years between September and October increased 6.37%, while the March/20 price line advanced 2.85% in the margin. Thus, the reading is that the 5-year average moved positively away from the price line of the current driver contract, even though it also showed some advance in the margin, albeit insufficient to avoid widening the distance between two lines between September and October. For October SAFRAS & Mercado had forecast prices at around 12.30 cents, which was 1.26% below the effective average price of the period, of 12.46 cents. For November SAFRAS & Mercado expects prices to be around 12.40 average, which must mean an 0.46% annual decline, along with a 3.07% decrease in the margin compared to the previous year, and a 21.90% decline from the five-year average price for the same period.