August 17, 2007

 

Brazil sugar, soy market applauds dollar rise; ignores market turmoil

 

 

Traders on Brazil's sugar, soy, and ethanol markets barely blinked again on Thursday (August 16) as global commodities futures markets wobbled, cheering instead a US dollar that rose an unexpected 3 percent to 2.09 Brazilian reals in one day.

 

"This is good news, since the effect of the currency is more important than the fall of (soy futures prices) on Chicago," said Fernando Muraro, a soy analyst at local Angencia Rural consultancy.

 

"Business was already starting to pick up last week, given a weaker Brazilian real," agreed Tarcilo Rodrigues, the director of Sao Paulo-based ethanol trading company Bioagencia. "The weaker it goes the better it is for us."

 

Call it a sea change for Brazil, which just a few years ago might have been engulfed by a wave of financial panic due to plunges on Wall Street or a hiccup from Asia's markets.

 

After four years of prudent fiscal policies, however, the country - just one rating away from investment grade - has significantly bolstered its financial reserves and trimmed its external-linked debt.

 

Just as important, the country's soy and sugar sectors already have seen worse days in the past year, say local traders.

 

"There's nothing new here - in fact, New York sugar prices today held above 9 cents per pound," said a Sao Paulo sugar futures trader, noting that prices had fallen earlier this year toward 8.50 cents per pound.

 

The trader added that some of his clients - who have viewed this harvest through extremely bearish eyes - are already well-fixed for the ongoing 2007-08 season.

 

Soy producers, for their part, say they are still buoyed by relatively high prices on the Chicago Board of Trade, helped by soaring US demand this season for corn-based ethanol.

 

And analysts add that a weaker dollar may even help ramp up the planted area for Brazil's new soy harvest from previous estimates, as long as Chicago soy futures don't collapse.

 

"If the dollar stays at 2.10 Brazilian reals, I see Brazil's 2007-08 soy harvest growing by 7 to 10 percent from last season, up from our current estimate of 5 to 7 percent," said Agencia Rural's Muraro.

 

By contrast, just a few weeks ago, the US dollar fell to a seven-year low of around 1.90 Brazilian reals, and most pundits predicted it could march on to BRL1.80, sorely compromising Brazilian competitiveness in its commodities sectors.

 

Despite all the excitement about the currency this week, however, traders also cautioned that it may be short-lived.

 

"Of course, a global slowdown could mess with commodities prices," said a trader at key Parana sugar and ethanol milling group Santa Terezinha.

 

Nevertheless, most also agreed it is simply too early to call either way for the moment, and added that they are just enjoying a weaker dollar while it lasts.

 

"Sellers are definitely coming back to the market today, with this dollar," said Ricardo Camussi, the director at the Brazilian division of ethanol trading company Vertical UK.

 

Unfortunately, buyers - who are now betting on a still-stronger dollar in coming days - continue to hold out, as they wait for even better prices, he added.

 

On Thursday, prices on the domestic sugar market edged down just 0.08 percent to BRL25.15 for a 50-kilogramme bag of 150 icumsa (with tax ex-mill) compared to the day before, according to the local Cepea-Esalq index.

 

Icumsa is a numerical grading system of white sugar, wherein lower numbers show higher-quality, whiter sugar. Color 150 icumsa makes up 80 percent of trading on the domestic market with colour 100 icumsa comprising the balance.

 

Meanwhile, domestic soy prices at the country's No. 2 port of Paranagua on Thursday stayed exactly the same as the day before, with sellers looking for BRL39.50 for a 60-kilogramme bag, while buyers were seeking BRL38.70.

 

By contrast, soy prices on the Chicago Board of Trade for the September contract plunged 39 3/4 cents to US$7.99 1/4, while New York Board of Trade sugar prices for October dropped 36 points to two-month lows of 9.09 cents a pound.

 

On Brazil's local futures exchange, BM&F, sugar prices for the September contract edged down just 0.25 percent to BRL11.60 from the day before, while September soy prices dropped 1.15 percent to BRL18.60 from the day before.

 

Brazil is a leading global producer and exporter of soy, sugar and ethanol.