The futures sugar market in NY plummeted 79 points in the week, reaching 16.20 cents per pound for October/2014, the lowest point since last February. The other months showed falls between 22 and 57 points or 5 and 13 dollars per ton, with largest pressure on shorter maturities.
However, we still haven’t reached the lowest point in reais per ton in the year which was R$816.87. With the dollar closing at 2.2600, this would be equal to 15.76 cents per pound in NY today. Think about this. If we take the average price in reais since 2012 (when the world surplus situation was a whole lot worse than it is today), the average is R$100 per ton over that of today’s and the lowest price in reais per ton since 2012 has been R$783 (NY at 15.10 cents per pound). Something is off here.
The sugar market feels great pressure fueled by the possible huge delivery of Thai sugar against the futures contract for October 2014 which expires late September. While export businesses here, whose demand is weak especially from the Far East, are at discount levels between 60-65 points for immediate loading, the October/March spread has shown an implicit cost of carry of 29.60% a year. The industrial consumers on the domestic market, whose sugar is greatly priced against NY, keep making the calculations to know how to make the most out of this opportunity since in order to do this there is the need for storage capacity, among other things.
An extraordinary volume of 12,000 puts for October/2014 was traded in the week, fueling the market fall via delta equalization. I will explain. When such a volume is traded, someone buys the right to sell the market at the exercise price of 16 cents per pound, while the counterpart is exposed (risking to be long) and sells futures to zero the delta, fueling the market fall and the volatility fall. Meanwhile, there is no decrease in the harvest expectation which will spice up prices.
The thing is – and this can turn on a yellow light – the total of open puts between the price of 17.50 and 16.00 cents per pound for October 2014 is 73,000 lots (3.7 million tons equivalent of sugar). Many of these puts were sold in order to capture a premium to pay for calls on a bet that the market would go up. With such an open volume, any disorder this market might experience is likely to bring about terrible consequences. There were people who repurchased hedge and bet on a high, selling low volatility premium – that was an interesting bet but turned out to be complicate.
Dilma’s attitude towards the market analysts, who foresee the meltdown of the economic situation in Brazil if the country has to put up with these people another four years, is disgraceful, to say the least. PT is an abominably dictatorial party, which suck up to Venezuela, Cuba, Bolivia, Iran, totally lacking morality after their first leaders were condemned and arrested, which loathes true political and democratic debate and – if they could – would send those who don’t bow before their arrogance, haughtiness and stupidity with which they have ruled for (?) 12 years to the dungeons.
What they have done to the analyst of some bank who said what everybody already knows, having a price set on her head by someone who is the poor version of Vlad, the Impaler. It is a huge shame. The climate of terror is installed in the Brazilian politics by standby villains and people are scared of speaking out. We are this close to having our own Gulag.
It is worth repeating journalist Reinaldo Azevedo’s recent comment: “The rural producers are usually disliked by some minority and noisy sectors. They get beat up by the left, the greens, the Indians, the press, progressive actors and actresses, global warming fanatics, Bono Vox, Sting. In short, this is one of the only countries in the world where those who produce wealth are targeted by those who produce speeches”.
Have a nice weekend everybody.
Arnaldo Luiz Corrêa
