Ingredients in the Pot

March 13 to March 17, 2017

Conceptually, volatility on the commodity market is closely linked with product supply and demand. The bigger the uncertainty about the availability of some raw material, the more participants will be willing to pay more to protect against the negative effects this rupture can bring on to them. Likewise, exogenous factors can contribute to maximizing price fluctuations. On the sugar market, the ingredients cooked in this pot have abounded. 

A generous dose of uncertainty comes from India when the production perspectives and the possibility that country imports sugar are analyzed. The price of the oil barrel below fifty dollars and the real appraising against the American currency are other components which negatively affect the ethanol parity, decrease the margin of contribution and push mills to maximize sugar production. This, along with the preceding perspective that the production mix of the 17/18 harvest prioritizes sugar production, depresses prices on the foreign market even further. 

Actually, in commodities, there are times when all the factors look bullish and there are others, as the case seems to be now when all the factors look bearish. Euphoria and despair take turns being the leading actor on this stage called market, seducing a hoard of devoted followers who sometimes act with childish enthusiasm and sometimes with morbid pessimism. 

Just like we heard, a few months ago, stubborn managers ignoring the high traded prices in real per ton which assured a great result for the companies (because they believed the futures market would go up even further), now we hear out of the same mouths “there is too much sugar” and there is fear there will be larger falls ahead. Go figure. 

In face of the impossibility, we can predict the future, with the exception of those who still believe in gurus and look for doctors who prescribe medicine produced at their own drugstores, the best “antidote” for life crises that hit us is using the calculator and discipline. That’s why it’s comforting to know, for example, that several mills are hedged between 80 and 100% for the 2017/2018 harvest. And some have already gone into the fixation of 2018/2019. That is, they have done their homework, treated business with discipline and laid off the spiritual advisors. 

Prices at levels we saw this Friday, with a 17.50-cent-per-pound low trading in May/2017, start changing European producers’ approach. For example, will Europe expand its export like it was thought when the market was hovering over the 22-23 cents per pound? Low sugar prices on the foreign market narrow the arbitrage with ethanol and should pressure continue abroad, wouldn’t it make sense for the mill to produce ethanol whose value is best for the immediate cash flow of the mill? These answers are gold.

In other words, the fall potencial from now on is starting to be smaller. Have we hit bottom? Commodity markets usually exaggerate in highs and lows and it would be fearful to bet we have seen bottom, but the funds liquidated their positions well and made a lot of money off of them. Based on last Tuesday’s closing, they are only 95,000 contracts long. NY can retract a little further, going for 16-17 cents per pound because seasonally April-May-June-July have lower average prices than March, but we see an eventual visit to these levels as an opportunity of fixation for the industrial consumers or even hedge repurchase for those who have a 15-year-old boy’s blood pressure. 

The ingredients abound, as we have said, and the result will depend on their dose. March delivery was a point of exhaustion of a bullish market. Our hitting bottom will depend on what will come out of this pot.

NY’s closing at 18.17 cents per pound and the dollar at R$3.1010 represent less than R$1,300 per ton. And there goes more than R$450 per ton since the high traded in October last year. It makes you envious, doesn’t it? Don’t despair; put on a really sad bolero CD, get a box of tissues out and drink a shot of whiskey. It will go away.

Is Brazil at the bottom of the well too? Let’s hope so. Thirteen million people unemployed, 7.2% drop in GDP in two years. A legacy of a government of rascals, corrupt people and outlaws. Few are saved out of this mire that the national political life has turned into. What a nightmare! Like the chorus that became famous in the 80’s, “if you call out thief, anyone could be one”. The Blue Label is still waiting to be drunk to celebrate the day when the Number 1 thief is arrested.

Put it down on your calendar: the Archer Consulting XVIII Intensive Course on Futures, Options and Derivatives – Agricultural Commodities (in Portuguese) will be held 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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