The sugar market closed Friday with March/2018 nailing 14.00 cents per pound confirming that feeling we all have: we are living one of the most boring periods ever in terms of sugar trading.
The market has been stuck within a restrict price interval for months waiting on some change of great scale in the sugar/ethanol fundamentals. We have practically been between 12.50 and 15.00 cents per pound since June. The open position plummets together with the volume of daily businesses. Watching an ice block melt or watching a game of domino on TV are certainly more exciting activities than looking at the screen with the sugar quotations.
The volume of businesses in the future is mediocre – up until late September, the average daily volume of futures contracts of sugar traded at the exchange in NY was 133,000 lots. In October, the average up until November is 67,000 daily lots or an almost 50% fall. The open interest in the yearly average was 792,000 contracts. Today we are at 700,000. I wonder if the funds have gotten tired of playing roly-poly.
On the other hand, as a trader has commented, the number of reports that pop up everywhere pointing to the excess of sugar in the Milky Way and the imminent total collapse of prices on the foreign market is strange. They now talk about 10 cents per pound and a ceiling of 16 cents for the next years. Just like we saw several horsemen of the Apocalypse pointing to the total collapse of prices on one side or the end of the cheap food and the explosion of the commodities and energy sector on the other, we have to keep common sense.
The fundamentals of the market on the medium and long-term are constructive. And it is not just because of the sugar which helps with the stagnation of the production of ATR on the part of Brazil, the lack of investment, renewal and expansion of the industrial park but also because of the ethanol demand which is coming up and the great chance of an economic recovery which is not influencing the prices yet.
What is noteworthy is the quick change in the perception on the part of the mills about the sugarcane production for next year. Many don’t believe that the Center-South will be able to repeat the amount of sugarcane produced in this harvest for the 2018/2019 harvest. The speedy change in the mix for more ethanol is another one of the certainties which surround us for next year. The recovery of sales of new vehicles is not duly reflected on prices yet.
As well noted by economist José Roberto Mendonça de Barros in a recent article in O Estado de São Paulo newspaper, “the robust recovery of the automotive sector is on the way to a more than 10% growth”. This recovery still hasn’t translated into the supply and demand reports going around on the market. A growth this big dries up more than a billion liters of ethanol in twelve months. Besides, each percentage point of growth in the flex car fleet choosing the use of ethanol dries up 280 million liters. As you can see, there is a change here and there which when put together can speed up the recovery of the market.
It is worth remembering the presentation by the director of the Grupo São Martinho, Helder Gosling, on the occasion of the Ethanol Summit some months ago in São Paulo. In it, the executive spoke about the structural deficit of fuel in Brazil. The accumulated deficit starting in 2025 until 2030 shows a “hole” in the supply of about 25 billion liters. Add the stagnant maximum capacity of refining and the lack of investment to this and a liberal government as of 2019 and an economy growing by over 2-3%. Raise your hand those who believe in a 16-cent-per-pound ceiling…
Unlike what we had imagined, it doesn’t actually seem that the market’s reaction will come in October. The average daily closing price of the futures sugar market in NY is at 14.17 cents per pound, 120 points lower, or 7.8% below what our price model predicted. Without getting into the obviousness that models are faulty, the fact is that the heavy volume of open fixations of the mills which have gone from October to March was important to inhibit a reaction of the sugar prices. The question is whether it will come in November.
Good news: the book “Derivativos Agrícolas” (in portuguese only) partnership with journalist Carlos Raices, can now be found at some virtual bookstores at Amazon Books, iTunes, Google Play, Kobo and Livraria Cultura: https://itunes.apple.com/br/book/derivados-agr%C3ADcolas/id1294585521?mt=11
The registrations for the XXIX Course on Futures, Options and Derivatives on Agricultural Commodities which will be held on March 6, 7, and 8, 2018 in São Paulo, SP at the Hotel Wall Street are already open. For further information: priscilla@archerconsulting.com.br.
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