The futures sugar market in NY closed this Friday at a high compared to last week. October 2014 closed at a 17-point high (3.75 dollars per ton) quoted at 17.14 cents per pound. All the other months closed at more vigorous highs, ranging positively between 33 and 45 points, about 7 and 10 dollars per ton. The pressure is on the current month.
The spread for October/2104 and March/2015 is expanding up to 163 points, probably anticipating a meaningful Thai sugar delivery, according to a market trader. The spread has an implicit 24.78% cost of carry a year, which is unbelievably high. Just for the sake of comparison, the same spread for the 2015/2016 harvest shows a 4.98% carry a year.
With sugar widely available for the short term, there is no rush for the end consumers to buy ahead of time in order to refill their stock. Nothing in short term seems to worry them and evidently discounts loosen and the internal market feels the sugar pressure which would be for exporting before and now seeks internal opportunity. Since early May, sugar for export in reais has fallen a little less than 3% while sugar for the internal market has fallen three times as much. The bad economic performance and the decrease in consumption are factors which have influenced this variation.
In reais per ton, a parameter which I find important for the analysis because it neutralizes the currency variation, we have worked out that the average sugar value this year is at R$885.00, having already reached R$982.00 at a high and R$817.00 at a low. The closing on Friday pointed to R$876.00. Over the last two months, the correlation between the prices in reais per ton and the sugar quotation in NY in cents per pound has been 92%. And we can also see that the currency effect (variation of the real vis-à-vis sugar in NY), which should cause an important negative correlation, is a little over -0.25. That is, the market is simply tied to the quotation in NY.
By using the same arguments brought up earlier in this weekly comment, I believe sugar has a support which today could be translated into 16 cents per pound and a significant resistance at 19.20 cents per pound. Some strategies with options can be created in order to try and capture this vision. The weak margins we have been living with during these difficult times means there is a need for being creative to scrutinize opportunities on this market, without giving up on risk management. I believe we are at a point where conditions should be created to take advantage of possible spasms on this market. They are sure to come.
Today, ex-mill sugar production cost, worked out by the model developed by Archer Consulting, is at R$34.9800 per 50-Kg bag. For a mill located at the Ribeirão Preto area, for instance, this is about 16.25 cents FOB Santos per pound. Considering that the FOB discount for shipping in August is 75, NY needs to be at 17 cents per pound to break even. That is, there is hardly any margin.
Ten out of the last fifteen sessions at the NY Exchange have had a daily volume below 100.000 contracts. As a broker in NY has put it, “to say this market is quiet is a understatement”. It must be more exciting to watch a turtle race.
Remember the interview with Michael Lewis we commented on here early last April about the High Frequency Traders and the repercussion it had in the USA when he said that the stock market was rigged? Well, an article published by the Wall Street On Parade site (unrelated to the Wall Street Journal) this week reports that the president of the Chicago Exchange, Terrence Duffy, has been trying his hardest to state that the commodities exchanges are immaculate and different from the stock exchanges, according to the testimony he himself gave to the Senate. However, last Tuesday three Chicago traders filed a lawsuit with the Federal Court against the president of the Exchange and other individuals holding executive roles at the institution on the grounds that among other things 50% of the volume traded in Chicago refers to operations whose buyers and sellers are the same people, falsely suggesting volume and price movement. That is, shameless manipulation. The big question is: could this possibly happen at the ICE? Could this possibly happen specifically with sugar contract?
Lula’s astrological hell may be just starting. An economist friend on the market comments that if Lula loses the election (admit it, he is an ex-president-in-office) he cannot forget that José Dirceu gets out of prison next year and must be really angry for having been abandoned by his boss. But it is still early to make conjectures because according to this friend “we can only know how an election or mining has turned out after the counting is done”.
The 1st Advanced Course on Agricultural Options, which will be a two-day long event focusing exclusively on options about agricultural commodities, starts on Tuesday, July 29. There are still vacancies.
Have a nice weekend everybody.
Arnaldo Luiz Corrêa
