Sugar Update: Petrobras did exactly what it needed to.
The last few days, I’ve sent 2 notes on Sugar and why I believe it’s poised for hyper growth amidst the oil supply degradation taking place thanks to US/IRan.
They are here:
Apr 29 - Sugar Just Round-Tripped 3 Years… and Oil Is Starting to Matter
Apr 30 - Here’s Where Sugar Will Likely SkyRocket. Soon
On Wednesday April 29, I noted the position I started building at $13.70. This was after the initial runup in sugar prices throughout March had faded back.
The thing we needed most to happen, mills in Brazil to shift to more ethanol production VS outright sugar, hadn’t yet become a reality. A.K.A. we saw sugar run up on the anticipation that Sugar follows Oil - this from early, impatient traders.
The detailed reason and why the timing of this…. I outlined here.
But the idea is simple:
Sugar has been in a massive downtrend.
But thanks to early traders, the US Iran war gave a warning sign in 2 ways.
#1 - The raise in /SB prices offset many technical downtrend areas and told us momentum had the ability to shift in a big way.
#2 - We saw the massive divergence in Oil and sugar prices take place:
Yes, this type of price divergence often comes back to equilibrium. But the low prices in Sugar gave an asymmetric bet on the thesis playing out.
With Oil going higher for longer, it let us see that Brazil could be forced to raise the artificially low prices in their country.
Petrobras controls everything.
And I noted what we needed to have happen here in yesterday’s note.
They decide the end users price, and they make the decisions that guide the mills profitability…
For every % of production of sugarcane in Brazil… Mills can produce the Sugar itself or switch to ethanol production.
and that matters…
Because as the Global price of Oil is repriced higher, Brazilian efforts by Petrobras to artificially lower their fuel prices to the end consumer would be squeezed.
If they are forced to reprice based on Global price pressure, the following would occur:
Higher gasoline prices increase ethanol demand.
Higher ethanol prices improve margins.
Mills re-optimize.
More cane is directed toward fuel.
Less is available for sugar.
Here’s the update
Yesterday I wrote we needed to see Petrobras, the Brazil chief of Oil raise the price of ethanol.
More specifically I wrote this:
As of today, Petrobras is keeping Brazilian oil prices artificially low.
For local politics, Brazil has not yet adapted to the rise in oil prices worldwide.
But….If oil prices remain elevated… as they will if the disruption persists… the gap on ethanol/sugar widens.
Petrobras will only continue to absorb losses to a point.
They’ll be pinched by Global Repricing….—-
When Petrobras raises domestic fuel prices, gasoline moves closer to global parity. Ethanol responds immediately.
That is when the signal becomes visible.
That is when the decision at the mill changes.
The timing was spot on.
Here’s what I’m seeing today:
The price of Sugar today?
Up again, over 2%.
Just printed $15 - Up 13% in the last week or so.
We’re just getting started here.
Cheers
-PriceTrader