The sugar market in NY closed the week at a 46-point (10 dollars per ton) fall in the first maturity month (May, 2017) and between 20 and 42 points (4.50 and 9 dollars per ton) in the other months until July 2019. The funds liquidated about 25,000 lots and now they should be long by 60,000 lots. Little by little the market will find its support. We believe the market can eventually hit 16.00-16.50 cents per pound due to the panic and mainly the eventual poor-structured over-the-counter operations which have several levels of disappearance (the famous knock-out) at the 17-cent-per-pound level.
As the saying goes, “all good things must come to an end”. We could use it to illustrate the sugar market nowadays. Many managers thought those fabulous R$1,600-1,700 per ton, the sugar equivalence in NY converted into real, traded in September, October and November last year, would last forever. I hear stories by an executive at a bank connected to the sector about companies that decided to put on hold, at that moment of peak of quotations in NY, new pricing and only go back to hedging when the value in real came close to R$2,000 per ton, which – as we know it – has never occurred. This is the part of “all good things must come to an end” that some managers were not able to absorb. Lack of discipline and risk management.
Now, with Friday’s closing for May/2017 at 17.71 cents per pound at the NY exchange and the exchange rate at R$3.1150, we are at R$1,260 per ton. As an attentive manager put it, “things change a little for the mill if the price goes from R$1,700 to R$2,000. But they change a whole lot (to worse) if it goes from R$1,700 to R$1,200”. So, we have to turn the page. It would be better if we learned from the mistakes, but we usually just forget about them.
The period that runs from April to July is seasonally the time for low prices on the futures sugar market reflecting the strength of the entry of the Center-South harvest. I believe a good part of this historic pressure on prices has already been anticipated with the huge settling of the long position of the funds and should be softened in the following months due to the smaller available volume of pricing on the part of the mills which, as seen by our model, are relatively well fixed for the first maturities on the NY screen. This is the “bad things won’t last forever” part.
The past months have been marked by the atypicality of the behavior of commercial negotiations. Two curious examples are: because of credit restrictions, mills that could only fix prices of export sugar pretty close to loading obtained a fixation average in cents per pound higher than that of those well capitalized companies. That is, the credit restriction that should be a hurdle for the mills with tight cash flow ended up beneffiting them. Conversely, in the off-season, capitalized companies held on to ethanol hoping to sell it now with enough gain to pay the financial and carry costs. As for the companies with cash problems, they sold the ethanol before that and ended up selling at the highs while those who carried stocks watched prices plummet. What a phase!
Some positive news in the economic setting will have an impact on the sugar market, not necessarily positive. Inflation has fallen more than what was expected and the estimate is that internal interest rates will drop to 8.7% yearly until the end of the year. With the possible increase in American interest rates, the spread between the two of them narrows and decreases the premium of the contracts in real per ton along the price curve via NDF. With a stronger real, the narrower exchange coupon and oil showing no sign of improvement, the most careful thing to do is think about opportunities of fixation in real per ton. The revenue in real of the companies should decrease in the 2017/2018 harvest. While the April to July period is terrible for the mills to fix prices of sales in cents per pound, for the industrial consumers the time is coming.
An important figure in the sector, an opinion leader, known for the nobility and eloquence, in a recent group of friends, was teaching the key qualities every executive needs to have to conquer the current challenges which we encountered on the sugar market at the start of this year – beauty and patience. A curious speaker wanted to know more details. The wise executive then revealed, “if everything works out, that’s beautiful. If it doesn’t work out, just be patient”.
Put it down on your calendar: Archer Consulting XXVIII Intensive Course on Futures, Options and Derivatives – Agricultural Commodities (in Portuguese) will be held on September 19 (Tuesday), 20 (Wednesday) and 21 (Thursday) from 9:00 am to 5:00 pm in São Paulo-SP at the Hotel Paulista Wall Street.v
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Have a great weekend.
Arnaldo Luiz Corrêa
