April 3 to April 7, 2017

After eight consecutive weeks closing at a low, the futures sugar market in NY managed to take a breath and ended Friday’s session with one point up against the previous week. May/2017 closed the week at 16.77 cents per pound. Last weekend with positive signal was on February 3rd when NY closed at 21.11 cents per pound. From then on, a 434-point melting, a little more than a 95 dollar-per-ton fall. An eight-week-long fast like the one which was broken this Friday repeated itself in July 2014. Have we hit bottom?

At this price level, the mills start making calculations about the competitiveness of ethanol in comparison with export sugar. It is known that for the mills, at the start of the harvest, it makes much more sense, from the financial perspective, to produce ethanol. The net input value in the mill’s needy cash flow at the start of the harvest is higher with ethanol. With export sugar, the product is paid at the pace of delivery of the mill to the trading companies.

However, the price level of 16 cents per pound creates a demand for sugar and limits production expansion in competing countries. Industrial consumers, in Brazil, start fixing their prices so as not to take unnecessary risks ahead. Therefore, it is hard to believe the market will fall below this support, given the current conditions.

It is common in these futures markets of commodities for us to hear a lot of screaming on the part of the producers when the funds bring goods prices down. They revolt and become dissatisfied with the “manipulation of prices” caused by the funds. “It is a shame”, some overreact. However, when these same funds, through the force they represent together, raise prices to levels never seen before, without any consistent fundamentalist reason, then there is no problem. “Blame the fundamentals”, others exaggerate. And this is the way the market goes.

What happens today is that those points that could be decisive for the continuation of a fall seem to be running out of breath. The non-index funds are long by 36,500 lots, when it was thought they liquidated their positions when the market plummeted 140 points. Now, it seems to me there might have been fixations on the part of some mills fed by the panic.

The performance of the sugar market in NY during March was below the estimate of our price forecast model. By our model, the average price of the closing of the first trading contract in March would be 19.07 cents per pound. The reality was crueler: the average price was 18.06 cents per pound. For April and May, the model points to average prices of 17.02 and 16.51 cents per pound, respectively.

On February 17, in the Archer Sugar View, a report sent to clients, we said the model pointed, with a 95% certainty, to an average price in March between 17.78 and 20.93 cents per pound. It seems the market anticipated the fall and the next months should be less bumpy.

The tenth estimate of fixation of export prices of the mills on the futures sugar market in NY for the 2017/2018 harvest shows, according to the model developed by Archer Consulting, that up until late March 2017, 17.01 million tons had already been fixed (64.4% of the estimated export of 26.5 million tons).

The average price seen was 17.73 cents per pound. The average value of fixation up to now is R$1,503.90 per FOB ton including the polarization premium and considering the NDFs. The accumulated average price is 65.47 cents of real per pound, without polarization premium, representing an 18.84% increase in the average price for the 2016/2017 harvest and 58.27% against the 205/2016 harvest.

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) 2017 from 9:00 am to 5:00 pm at the Hotel Paulista Wall Street.

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Have a great weekend.

Arnaldo Luiz Corrêa 

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