Sugar


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MAKING A BAD DEAL IS EASIER

Weekly Comment – April 2 to April 6, 2018

A market executive linked to the mills has a great sentence that explains the current situation of the sugar market and what the most appropriate approach would be for the companies under such a bearish scenario as we are in now. ”Nobody needs to rush into making a bad deal”, he says.  There is no rebutting this argument even though the financial situation of most mills keeps them from at least considering this alternative. The start of the harvest is the moment to create cash flow, pay for costs, pay for suppliers and invoices which pile up on the financial director’s desk. Some mills, unfortunately, often end up accepting prices that are not profitable at all.

A mix of fear and regret under this scenario has reached the core of the commercial department. Fear that the recent apocalyptic predictions on sugar prices might eventually reach one digit and regret for not having fixed the sugar prices in NY when the market conditions, be it in cents per pound or in real per ton, were at a level where the bills were paid, there was money left and the stockholders were pleased. Today the stockholder goes to the company every day and makes the executives cut costs in all sectors. 

Fear and regret are usually awful advisers. However, it is much better to look ahead and structure so as not to let this happen again than to look at the rearview mirror and mope over what was not done. It doesn’t do any good to look for gurus or tribal chiefs who promise to do the rain dance and bring happiness back. When we ask the classical question “where did I go wrong?” in nine out of ten occasions we see that the problem is the lack of discipline and effective risk management.

It is important to structure the company so that the hedge has the same importance and is treated as carefully as the industrial and agricultural areas are. The improvement on the performance rates of these areas is enthusiastically celebrated, but the hedges are many times pushed into the background, when they are not used as a cruel tool of pure and simple speculation.

For example, some mills repurchased their hedges when the market hit 16 cents per pound, thinking that they would sell them back at better prices. The market, as you know, dove into lower levels making the company lose money. That is not risk management. That is pure speculation.

The sugar performance on the futures market in NY in the week was neutral with the contract expiring in May/2018 closing Friday at just about the same level as the previous week, 12.34 cents per pound. The equivalent value in real per ton improved due to the stronger dollar against the Brazilian currency because of the political turbulences of the week.

The non-indexed funds are 176,000 lots short, an extraordinary volume and it does not look like to us that they are thinking about buying them back. There is talk that a good chunk of this position is part of a long-short strategy in which the fund positions itself as long in an asset and as short in another one. In this case, they would be long in futures oil contracts and short in futures sugar and coffee contracts. In the accumulated of the year, they are profiting out of the oil bought because the market has gone up and profiting out of sugar and coffee sold because both have dropped.

The big question is what level of oil price, in case of a possible high on the foreign market, would make the funds settle their long positions and take profit or, conversely, what level of oil price, in case of a possible drop, would make them stop the loss and settle the position? In both cases, by the way, the funds would have to settle the short positions of sugar and coffee by repurchasing them. Who would sell new sugar contracts at the current price levels?

The hydrous price has dropped a lot in the week pushed by aggressive sales by the producers. What is behind this? To create cash flow or to freeze the positive arbitrage of ethanol against sugar, selling hydrous on the physical and buying sugar in NY for October, for example?

The sector is definitely not for newbies. More and more it takes focus, discipline and a good amount of creativity in the risk management to add value to the stockholder.

This has been a week full of great joy all over Brazil for those Brazilians who work hard and honestly and are not sponging off of the State. Finally, Judge Sérgio Moro has issued the detention of the convicted and former president Lula. This is only the first conviction and detention; there are still half a dozen lawsuits against him. I raise a toast to my readers delightfully sipping a dose of Blue Label (no, Diageo is not our client, unfortunately, although I am theirs) celebrating this epic moment of the Brazilian political life. To see a scoundrel such as Lula, head of a gang of criminals who led the country to the lowest level of rot in the history, behind bars is priceless (no, Mastercard is not our client either).

Registrations for the 30th Intensive Course on Futures, Options and Derivatives – Agricultural Commodities are 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.

If you want to get our weekly comments on sugar straight through your email, just sign up on our site by logging onto http://archerconsulting.com.br/cadastro/

Cheers!!! Celebrate as much as you can. Have a nice weekend everybody.

 

Arnaldo Luiz Corrêa

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