The futures sugar market in NY closed Friday’s session at 20.61 cents per pound for October/2016, an 84-point positive variation against the previous week (18.52 dollars per ton), while March/2017 closed at 21.09 cents per pound with an 81-point increase in the week (17.86 dollars per ton). All the other trading months closed with a positive sign.
We see that when the futures market makes an attempt at profit taking, the late buyers who quickly take advantage of the lower prices for fear of missing this opportunity again spring up. Sugar end consumers, mainly those from Asia, have a feeling that the commodity prices can increase even further and gradually try to redo their stock. Some admit they believed, up until last May, that the futures market could depreciate even further. The most optimistic buyers/consumers, for example, betted they would see 11 cents per pound traded at the exchange between last May and June, which historically are months which show seasonally lower prices. Today, with 11 cents one can purchase only half a pound. They are way off.
Several of these late buyers used the strategy of selling puts in the money (in March exercise price of 22 cents per pound) to lower the end cost of product acquisition against the traded price in the futures. It’s a bet. The fall in the implicit volatility in the premium of the puts and the increase in the traded volume support this hypothesis. It’s a good strategy with a well-calculated risk.
Market analysts not only in Brazil but also in the USA and Europe believe prices in NY will reach close to 25 cents per pound for March/2017 basically in line with the projections we had made some time ago. In the weekly comment of May 20 – so 100 days ago – we said our price model pointed then to March/2017 trading at between 20-21 cents per pound. We have gotten some humorous emails about the fact. Models fail, but this one didn’t.
The non-indexed funds are still keeping their robust long position at 327,000 contracts in NY, increasing a little against the previous week. They don’t seem to be in a hurry to pocke the huge amount of money they are spending even when rolling October/2016 to March/2017 with an apparent portfolio loss. I say “apparent” because the market provides operations via derivatives which can eliminate this onus.
The United States Department of Agriculture (USDA) has published a report about the impact of oil price changes on the use of agricultural lands and on ethanol demand. The USDA estimates that in 2020 (which for the purpose of comparison we use the 2020/2021 harvest) Brazil will produce 817 million tons of sugarcane – 50.8 million tons of usgar and 36.3 billion of liters of ethanol. Archer’s estimates are much more modest: a production of 720 million tons of sugarne to produce 42.3 million tons of sugar and 30 billion liters of ethanol.
Then, how will prices on the foreing market have to behave in 2020/2021 so as to adjust to a reduced availability – by 8.5 million tons of sugar and by 6.3 million of liters of ethanol? The answer is via price!!! As we have also said here recently only one factor can significantly change the perspective of more constructive prices for the next harvest: the significant fall in the price of the oil barrel.
If it is traded below 40 dollars per barrel for a long period of time, the bullish perspective might change. If oil prices are confirmed at 48-52 dollars per barrel, the chances for average sugar prices around 22-23 cents per pound are huge. If the barrel price goes beyond 60 dollars per barrel, the market can then turn more explosive. The USDA places as market floor the oil barrel at US$60 from 2017 to 2024 and as average from 80-100 dollars per barrel. If this is reasonable to be put into the equation, who dares stay sugar short sold?
Economist José Roberto Mendonça de Barros, MB Associates, doesn’t believe the dollar will change a whole lot due to external reasons, though he doesn’t rule out the possibility of changes due to domestic reasons. Oil should stay at around 50 dollars per barrel, but foreign commodity demand will stay very strong. Mendonça de Barros sees some significant improvement on the expectations of the economic performance, recovering GDP growth in 2017 to 2%, though unemployment will continue to increase. With the impeachment approval, Mendonça de Barros bets that capital flow to Brazil will pressure the exchange rate, which can reach R$3.0000 per dollar.
Next week will be market by the definitive defenestration of president Dilma Rousseff. She will go back to the ostracism, where she should never have left. Lula, her mentor, has been indicted by the Federal Police for passive corruption, fraudulent misrepresentation and money laudering, crimes linked to receiving undue advantages (I love this euphemism for a simple word which is kickbacks), etc. Brazil is getting rid of this bunch of damned communists who have sucked Brazil’s blood over the past thirteen years. I hope Dilma, Lula and all the other “companions” get the fate they deserve.
If you still don’t have the book “Agricultural Derivatives”, written by me and journalist Carlos Raices, download it free by clicking on https://archerconsulting.com.br/livro/
There are still spots for the 26th Intensive Course on Futures, Options and Agricultural Derivatives to be held on September 27, 28 and 29, 2016 from 9:00 am to 5:00 pm in São Paulo, SP. For further information, contact priscilla@archerconsulting.com.br
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Have a nice weekend.
Arnaldo Luiz Corrêa
