April 10 to April 14, 2017

There is a feeling among the sugar market participants that we are at a crossroads. It is not something new, but something that repeats itself on all commodity markets which goes from one end to the other really fast. The disorientation makes us become more bullish at the top (remember there were people thinking the market would go to 60 cents per pound in 2010 when it had reached 36 cents per pound) and more bearish at the bottom (when the market hit 10 cents in August 2015 and there were people saying it would go to 8 cents).

The market closed at 16.60 cents per pound in the week made short by the Friday holiday. It was a negative closing, the ninth over the last ten weeks, with May/2017 losing 17 points (3.75 dollars per ton) while the other trading months experienced negative fluctuations from 4 to 23 points.

Where the market is headed for is the question everybody asks. We are going through the period (April until July) in which seasonally the lowest average prices occur.The feeling is similar to that you have on a rollercoaster. In a little over 100 sessions, the market jumped from 16.03 to 23.90 cents per pound (from last May 11 to October 6). And, after reaching the apex, it slid down the hill in 125 sessions, back to 16.05 cents per pound (from October 6 to April 5). It gives you a freaking labyrinthitis.

We believe that the average price in NY for April should stay around 17 cents per pound (today it is at 16.52 cents per pound in 9 sessions). However, as models fail, the market might have already anticipated this picture foreseen for May.

Many doubts about the fundamentals make the market more nervous and more volatile. The size of the Center-South harvest, whose estimate by several consulting companies ranges from 582 to 612 million tons of sugarcane.  The size of the Indian harvest as of October (there is a lot of talks it is 25 million tons of sugarcane) and even the availability of sugar in the Center-South (numbers close to 37 million tons).

What is the market floor with so much bad news, after all? Ethanol (hydrous) today is trading at VHP sugar equivalent at 13.86 cents per pound, while anhydrous is doing a little better – 14.59 cents per pound. This could be considered the market floor. On the other hand, if Petrobras follows the gas pricing policy following the foreign market, the gas price at the pump would drop, because the fair price today is R$2.9650 per liter. This would put hydrous at R$2.0750 per liter.

Curiously enough, a reasonable volume of options was made in NY with the 15 cents puts being sold and simultaneously the 20 cents calls being bought at 20 cents per pound. That is, someone betting it won’t go below 15. As it couldn’t be any different, the volatility of the options has risen. Greater volatility is synonymous with greater uncertainty, And, due to these and some other reasons, we are all feeling kind of disoriented.

Professor Marcos Fava Neves made a comment about the recent episode of the ethanol import which, according to him, “mainly hurt the mills in the Northeast and led a part of the sector to ask for a rate between 15% and 20% of the taxes on imported fuel”. And he concludes, “I am for the free trade, therefore, against raising taxes as a form of barrier to the access to markets. Of course, if the product has subsidy at the origin, then we are not talking about fair competition and an equalization of input is justifiable. It is not the case”.

Just for the sake of curiosity, over the last ten harvests, the average sugar price traded in NY in May has been lower than that traded in April on seven occasions. Excluding the extremes, the average fall is 3%.

The funds have been very active on the futures market and the traded volumes compared to January, February and March show that. If there is some encouragement for the mills it is the fact that the fixation volume for May and July is pretty high and it will have little impact on the start of the harvest.

With the terrifying revelation that the Odebrecht construction company had a millionaire savings account to meet the whims of that one who is the dirtiest of all politicians in the Republic of Brazil, responsible for the greatest robbery of the public coffers in the history of humanity, there is only one thing left for us to do which is joyfully wait for the approaching day. The arrest of this infamous criminal. Brazilian politics is a bottomless pit toilet. How many generations will it take before the country can recover the self-esteem, ethics, and citizenship despite the stinking sewage it has turned into because of the mafia which has settled into the Brazilian state? It is a sad page of our history.

Archer Consulting 28th 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. Don’t leave it to the last minute and take advantage of the discounts.

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Happy Easter to you all!

Arnaldo Luiz Corrêa






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