I once heard an interesting point made by Nassim Taleb at a lecture. He said that if you drove a car head-on into a wall at 100 Km per hour, the impact could be fatal. Much more fatal than if you drove the car into the same wall twice at 50 Km per hour or 10 times at 10 Km per hour. That is, driving into the wall will have a greater or smaller impact depending on the speed and not on the wall or the car. I admire the professor for how simply he puts forward the obvious things.
I borrow the risk analyst and essayist’s argument to compare a market sudden fall with the same fall in absolute values, this time, diluted over time. The impact of the sudden fall is greater. When the panic walks through the door, the traders jump out of the window on the tenth floor. And some, while still on the third floor in free fall, still think “so far, so good”.
Take a look at the sugar market lately, for instance. We have been trading within a boring range of 250 points for six months, six long months. Since August 18, we have seen the high at 15.49 cents per pound and the low at 13.01 cents per pound. And the most interesting thing is that our perception is that the market seems to have fallen just now, right? The 13.01-cent-per-pound low occurred in September, five months ago.
In comparison, we are closer to the travelers in the car which drove into the wall 10 times at 10 Km per hour than that fatal car. Do you know what the average of the closings in NY over these 6 months is? It is 14.21 cents per pound. That is, considering the 13.38-closing of NY this Friday, we are at less than 6% off the average. But the feeling we have is that we have driven into the wall at 100 Km per hour.
The hustle and the amazement over the current trajectory of the futures sugar market actually come from the fact that those who tie themselves to the market fundamentals agree that the current price levels are incompatible with the cost of sugar production in the Center-South, from the fact that the parity with the hydrous is totally distorted and – a few understand that – from the fact that having a global sugar surplus does not make us able to cater for the logistic difficulties that India and Thailand have in order to supply the five or maybe six million tons of sugar that Brazil will not produce in this upcoming harvest.
Over these last 126 sessions, which comprise the abovementioned interval, the volatility has been 28.26%. Over the last 50 days, the volatility has been 26.75%, coincidentally the same as that of the last 100 days. But what is the point after all?
The point is that the market is about to make a more robust move. Six months of stagnation and downward volatility are components which usually wear out the funds and encourage them to undo their positions flying to other markets or even turning around.
I keep saying that the trigger will be the clearer future perception of the effective size of the sugarcane harvest in the Center-South for 2018/2019, and especially of the percentage destined for each product. The funds continue carrying a huge short position of 146,000 lots and make some hundreds of million dollars out of it, but they are still in no hurry to settle it as long as there is pressure on the part of the mills which are late fixing their sugar and, mainly, while the consumers do not even make an effort to bring forward eventual purchases.
What has kept the market from responding is not the so-called surplus hovering our heads because this is the same one that was discussed 2, 3 or 4 months ago. What has kept the market from responding so far is the volume to be fixed by the mills and the bad performance of the soft commodities which are the selling point of a long short operation carried by the funds, which shyly settle the purchased part (energy) and slowly undo the sold part (sugar and coffee).
February’s closing average should be smaller than January’s as shown by our model. However, March should have a reaction pointing to above 14.50 on average, which means we can expect prices hitting 15 cents per pound again.
Put it down on your calendar – the XXX Course on Futures, Options and Derivatives in Agricultural Commodities will be held on August 7, 8 and 9, 2018 in São Paulo, SP, at the Hotel Wall Street. For more information: priscilla@archerconsulting.com.br
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Have a nice weekend.
Arnaldo Luiz Corrêa
