The week was marked by a start caused by the large volume of sugar delivered against the expiration of the March futures contract in NY. Over a million and two hundred thousand tons of sugar were received by a single trading company (Wilmar), out of which 932 thousand tons were from Brazil, 117 thousand from Guatemala and the remaining split among Argentina, Costa Rica, El Salvador, Honduras, Mexico, and Nicaragua. It was the largest volume ever delivered on a March expiration, whose average up until then hadn’t gone over 480 thousand tons. And it is also just about three times the average of the volume delivered by the Center-South in the months of March.
So, dear readers, unless your name is Alice and you have a white rabbit that wears a vest and carries a wristwatch as your inseparable companion, the truth is that March delivery has a stunning bearish tone, regardless of the fact that the recipient has mills all over Australia, New Zealand, and Indonesia.
Such a large volume delivered over the offseason period in the Center-South shows that the sugar physical market was (or still is) adrift and the best buyer was (or still is) the exchange itself. One can come up with any bullish argument he wishes to justify the operation, but its consistency is pretty wishy-washy. This volume delivery is bearish.
Maybe even more surprising than the delivery itself is the calm with which the funds have been treating the market. We have already wiped out the 2017 gains, we have already traded way lower than the 12/31 closing (19.51 cents per pound). The market heroically closed Friday at 19.52 cents per pound. And the funds – coincidentally – have almost the same position they had at the end of last year. Although they have made a lot of money off of sugar, I don’t find it reasonable they will put up with this nonsense for long.
In addition, as we all know, sugar seasonality shows that April, May, and June are lower price periods. Even running the risk of biting my own tongue, it is always worth repeating that if there isn’t some impact change in the sugar fundamentals, the chances that we will see this market plunging into 17-18 cents per pound in the second quarter of 2017 are overwhelming. “No way!”, shouted a trader in São Paulo. “Not with such a strong white premium”. Maybe, but we saw white premiums over 130 dollars per ton before the market fell flat in 1995/1996. But that’s a good argument.
If we have the white premium as an important supporting factor and we can add to it a strong volume of export pricing on the part of the mills for 2017/2018 harvest, which relieves the futures market of an eventual pressure of origin price, on the other hand, we have some unsettling factors – the huge discount with which hydrous has been traded at, between 300-400 points of VHP sugar in NY; oil that doesn’t go anywhere and is still at 55 dollars per barrel; the real which appreciates against the dollar and makes hydrous fall even deeper; Petrobras, which has lowered fuel prices to follow the transparency policy of pricing, and so forth.
And we haven’t talked about India yet, which is an unknown factor considering so much conflicting information. How much has been absorbed by the market and reflected on prices? And another point – the average number of harvest estimates for the Center-South are close to Archer’s number, that is, 585 million tons. And what if it is 615 million tons?
Just as a guide or another cockpit dial – our price estimate model showed that the average closing value of the futures sugar contract in NY in February would be 20.76 cents per pound; it was 20.41, that is, 1.69% lower than that estimate. Now the model points to an average price of 19.07 cents per pound for March, 17.90 cents per pound for April and 17.17 cents per pound for May. Last month, the model signaled average prices of 19.36, 18.14 and 17.36 cents per pound, respectively. In a stressful situation, the price might come close to 17 cents per pound.
Put it down on your calendar. Archer Consulting XXVIII Intensive Course on Futures, Options and Derivatives – Agricultural Commodities (in Portuguese) will take place on September 19 (Tuesday), 20 (Wednesday) and 21 (Thursday) 2017, from 9:00 am to 5:00 pm in São Paulo, SP at the Hotel Paulista Wall Street.
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Have a great weekend.
Arnaldo Luiz Corrêa
