March 6 to March 10 2017

The futures sugar contract in NY closed Friday at 18.28 cents per pound for May/2017, a 124-point fall (28 dollars per pound) compared to last week’s closing after nipping at the 17.96-cent-per-pound low, the lowest trading level since last December.

Our followers saw that NY ended up going for the price level we had foreseen here a few weeks ago. Our prophecy has been fulfilled. Joking aside, again and again, we talked about the dissociation between the too bullish perspective fed by the huge long position of the funds and the naked reality of the traded discounts on the physical market.  And, we also insisted the mills fix their prices in real per ton because they wouldn’t be available for long. What astonishes us is the speed at which the market dove head first into below 18 dollars per pound. Since the 23.90-cent-per-pound peak traded last October, the market has plummeted by 25%.

After this fall, looking at the price history over the last years and the sugar seasonality, it is difficult not to accept the fact that we will see even lower prices in cents per pound from April to June this year. At least that’s what has happened in 71% of the times over the last 17 years. Unless something extraordinary happens – weather, shortage.

The numbers, always difficult to digest, coming from India bring huge volatility to the market and will stay so for a long time. The main argument is the difficulty most traders have in getting access to that country’s numbers. Data are poured out as if they were untouchable axioms and the obvious non-validation of these predictions injects more volatility into prices (the volatility of the options went up this week).

If in the Center-South, with just 80 thousand sugarcane suppliers, we have difficulty finding a consensus about the volume of sugarcane to be crushed in the Center-South for 2017/2018, how can we believe it’s possible to reach a consensus about the volume to be produced in a country such as India with its 35 million suppliers (some think it’s more than 50 million), supposedly with a lot more difficulty figuring out these numbers? Right. 

Those who took advantage of the extremely profitable high prices in real per ton and didn’t fall asleep at the wheel or didn’t read someone’s guidebook hit the nail on the head. They did the basics and made money. In commodities, seeing the international price trade above 50% of the cost of production over a long period of time is rare. In 2016, the average sugar price for VHP export was R$1,437 per FOB Santos ton.

Over the last 12 months up until last January this year, the market has been above R$1,500 per ton in 41% of the daily closings. And in 67% of the times, it has been above R$1,400 per ton. This Friday’s closing was at R$1,319 per ton. It’s still a very profitable price. That’s why, when compared to ethanol that trades at extremely low prices, it is just natural that we will see more sugarcane aimed at sugar production in 2017/2018 and that eventually there might be a stronger pressure on prices. 

Is there a chance prices in the April-June period will reach 16-17 cents per pound? Absolutely. However, so that this doesn’t happen, some bearish factors would have to be eliminated, such as the Center-South crop larger than 600 million tons of sugarcane, oil below 50 dollars per barrel, the increase in American interest rate which pressures the risk assets. It’s been easy to be bullish, hasn’t it?

There is a rumor that some companies in the sector, believing the futures sugar market would continue its exuberant high trajectory, made some structured counter operations just to hang themselves farther down the line. Things like securing sales fixation at 20 cents per pound, but if the market falls to 17, it stays long at 20 cents per pound, and other “precious things”. 

It is even more unbelievable that those things still keep happening. And that’s when- when the water starts to recede – we find out who was naked in the pool. Nothing against derivatives or their suppliers, but the companies that use this tool must aware of the side effects. They take prescription drugs like they are taking aspirin. And history repeats itself. Last year, solid companies, on the grain market, making over R$1 billion, went under because of poorly structured operations. Doing derivatives without knowing the Greeks is like crossing Paulista Avenue in São Paulo at five o’clock in the afternoon blindfolded. 

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

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