The futures sugar market in NY closed the shortened week by the Easter holiday at 12.35 cents per pound, reaching the low quotation of 12.18 cents per pound, the lowest in two and a half years (September 2015). The sick patient (market) gets worse every day, although the diagnosis has been the same since the start of the year, with fluctuations in the intensity of the fever. An old trader mentions the motto “the best thing for a bear market is a bear market”. Although this statement looks illogical, it means that when it comes to commodities the prices have to stress out to the point where the threat (surplus) is cured by the lack of availability of the product because of the low price itself, which will lead to a smaller production in the following years or the lack of farming practices, etc.
Sugar is on the top of the list of worst performance of the commodities in this first quarter of 2018 closed on Thursday. It dropped nearly 19% followed by natural gas by 7.5%, and coffee by 6.3%. On the other side of the table, cocoa went up 35.3% in the year. In the accumulated of twelve months, the so-called soft commodities got greatly beat up: sugar 28% down, orange juice 16.5% and coffee 15.1%. On the twelve-month high, Brent and WTI oil stand out, both above 30%.
The indigestible icing on the cake for the producers is the increasing shift in the world surplus estimates, which are already close to 15 million tons now if you believe them. Well, the market is here to prove it, after all, 12 cents per pound can come to an end in no time since there are people who believe there will be a one-digit market pretty soon.
Over the last ten years (from April/2008 to March/2018), the average of the closings of the most traded futures contract at the exchange has been 18.19 cents per pound, having reached the lowest price of 9.52 and the highest price of 35.31 over the period. Over this period, in just 0.27% of the times, the market has traded below 10 cents per pound. And in just 7.5% of the times, it has traded below 12 cents per pound!!! Statistically speaking, going short selling below 12 cents per pound is an excellent recipe for failure. However, bad things can happen.
The other day I heard a trader arguing with another one and betting that at the harvest start, more pressured, hydrous will go for the sugar price and not the other way around. This is the first year we have dealt with a factor which has never affected prices before and whose effects still divide opinions: Petrobras internal transfer policy of the gas price abroad sets minimum parameters for ethanol which we still haven’t seen work through an entire harvest.
The psychological impact on the consumer who sees gas price above R$4.00 per liter at the pump and hydrous price with a 2 at the front, encourages hydrous consumption even if the parity is below 70%. The consumer goes to the gas station and sees, for example, gas at R$4.09 and hydrous at R$2.99; he assumes that hydrous is much cheaper (when the parity should be R$2.86) and consumes hydrous.
The pressure of the harvest start will certainly affect hydrous price traded by the mills, which need to make money right away to pay for operating costs. However, my point is that there must be a limit to the drop in hydrous price at the start of the harvest to the level where it (the drop) approaches the increase in demand caused by the product due to the parity and discount the consumer sees in the pump price.
In other words, it is not the inflated world surplus of sugar that can set the continuously bearish tone on this weakened market, but the relationship between oil and real. Brent oil would have to plummet 48 dollars per barrel for hydrous to get close to the current sugar equivalent price. Keeping in mind that in this case the funds that have a long position in energy and a short position in soft commodities, as mentioned here other times already, would have to settle the oil position (selling it) and settle the soft commodities position (buying it).
A possible devaluation of the real would have a less disastrous effect because it would make the gas price go up, improving the parity of ethanol, although sugar would suffer further pressure because the mills would get more real per ton of sugar sold in export.
Another negative feature for the market which opens up opportunities: the October/2018 – March/2019 spread opened significantly because the increase in the estimated production in India and Thailand pressures the maturity month of October. The spread traded 141 points on March 28. This means that October is being traded with a 25.13% discount per year against March of the following year. This stratospheric rate can only be explained by panic because for this sugar carry, it should not go over 6.5% per year.
Registration for the XXX Intensive Course on Futures, Options, and Derivatives – Agricultural Commodities is open. The course will be held on August 7, 8 and 9 in São Paulo-SP at the Hotel Wall Street on Rua Itapeva. If you plan on taking it, remember that spots are limited and in the last events they ran out 40 days before the course started. For further information contact us at priscilla@archerconsulting.com.br
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Have a Happy Easter and a nice weekend everybody.
Arnaldo Luiz Corrêa
