The futures sugar market in NY closed Friday below 14 cents per pound, 13.98 accumulating a fall of more than 12 dollars per ton in the week. The October/2017-March/2018 spread widened a little more in the week due to a reasonable rollover volume on the part of the mills, the fixations that were supposed to be made against October and that they put off until March, hoping for better prices.
It has everything going for it, because our price forecast model shows that although the average price forecast for September points to a 14.01 average (until Friday it was at 14,12), in October the model points to an average price above that of September (15.45 cents per pound), it can even top out at 16.81 cents per pound. September, however, still has room to fall a little further (about 13.50 maybe).
While the funds enjoy the lack of fundamentalist news which justify the temporary increases in the price on the futures market, the pressure will continue and it will certainly make some of those mills which fell in love with the market a long time ago, in the vain hope of it continuing its path around 20 cents per pound, panic and they have a percentage of fixation of the 2017/2018 harvest much lower than the market average, which must be around 75-80%.
I believe, however, that the fun of the funds has run its course. Although some Apocalypse prophets have announced that the sugar should reach the lowest price in 10 years (8.90 cents per pound on September 28, 2007), this analysis that was all over the news last week, lacks deeper knowledge about what is about to happen in the Brazilian economy (which is recovering quickly) and, especially, at the current level the sector is at, with zero expansion and a potential for fuel consumption is just around the corner.
The non-indexed hedge funds still have a short position of 73,500 contracts (equivalent to 3.7 million tons of sugar) and are not pressured to get out of it and pocket an estimated profit of US$300 million, exactly because on the part of the mills there is still a great rollover movement. However, this should be over next week. The counterpoint lies in the fact that other hedge funds repurchased great part of their short position and moved the market small 11 points. It’s not exactly something encouraging to see the market demand almost 5,000 lots to move 1 little point.
The breath for the bulls will come, as we said here last month, from the ethanol. The calculations the mills make using the sugar price curve in NY and the scant futures real curve, which takes into account an exchange coupon of 4%, makes the ethanol brought into current value be much higher than the sugar price. The availability of the commodity produced by the Center-South next year might be much smaller if combined with the economic recovery and the consumption growth of the fuel.
There are strong reasons on the part of some banks and institutions to believe that the soft commodities (coffee, sugar, cocoa, cotton and orange juice) will recover in 2018/2019. A trader in Europe has commented that he believes the market can take a different path when the first forecasts for the sugarcane harvest for 2018/2019 reach the market. On the part of the mills, what we hear is that lots of them believe they will stop crushing earlier than they expected; others believe that the year’s production will continue stagnant.
The oil market will continue to be the determining factor for sugar pricing. Fall is starting in the Northern hemisphere. A possible price increase in the oil barrel price on account of geopolitical issues or just seasonal demand increase will be decisive to anticipating the production mix reframing for next year on the part of the mills in the Center-South. These are things that happen in the real world that nobody is paying attention to.
October’s delivery at the maturity of NY futures contract, which expires next week, can bring some disagreeable surprises. But there are market participants who believe that it will be a non-thrilling event. Buckle up and enjoy the ride.
Put it down on your calendar: the XXIX Course on Futures, Options and Derivatives of Agricultural Commodities will be held on March 6, 7 and 8, 2018, in São Paulo, SP at the Hotel Wall Street. The registrations will open soon. Don’t leave it to the last minute because the current edition ran out 40 days in advance.
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Have a nice weekend.
Arnaldo Luiz Corrêa
