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“Keep your face to the sun and you will never see a shadow.”
Helen Keller (1880-1968)
American writer and social activist

NY had a stunning closing. The sugar futures contract for October/2020 closed out Friday at 12.64 cents per pound, 116 points above last week’s closing. Twenty-five dollars per ton!!! Could it be more optimistic? Since the real, despite having given a shot at some recovery, closed out pretty much unchanged, the values in real per ton closed strong. That’s very tempting to increase price fixing. On average, the futures that represent the 2021/2022 crop for the Center-South (May, July and October/2021 and March/2022) appreciated 16 dollars per ton. For the next crop, they appreciated 7 dollars per ton.

There’s always room for optimism. Optimists and pessimists have struggled with each other all through human history. The optimist is that guy who believes we live in the best of worlds and the pessimist is that dude who fears that that might be true. On Monday, a regular reader sent me a message delighted about the market being in a strong upturn just after my weekend bearish comment, whose headline read “Buyers Wanted”. The friendly reader’s short message said, “Found them!!!”

There is no question that sometimes the sugar market acts like a reputation grinding machine. But we cannot hold on to the fluctuations that look solid, such as that of sugar this week that won’t withstand the slightest obstacle.

The release of the American GDP in the second quarter is scary. A 32% decrease that proves the IMF (International Monetary Fund) estimates are much more realistic and consistent than those drawn up by the respective governments.

Actually, the week started out with really positive news for the sugar market. Indonesia has allowed the issue of import licenses of 600,000 tons of sugar. China has also shown interest in importing 2.1 million tons. And this has given the market some breathing room.

Meanwhile, in Europe, sugar consumption in June improved against the previous month and production will be smaller due to the yellow virus that hit the sugar beet crops. To close the circle around the good news that affects sugar supply, Thailand expects to have the worst crop since 2009/2010.

The Center-South, as we know, has maximized sugar production to the point where a passing stock of around 3-4 million tons for the end of this crop is expected. Ethanol should come close to (or even go beyond) the equivalent price of sugar by the end of this year, especially if fuel demand improves substantially like, for example, it happened in June, which did much better than what the market expected. But, there is more on that subject matter. The devalued real has favored ethanol exports. The April/May/June quarter closed out at 536.6 million liters of export volume against 305.8 million over the same period last year – an increase of more than 75%. Globally, July has been a great month for the commodities on the whole: coffee has gone up by almost 18%, cocoa 10%, sugar 5%, cotton 4.5%. Corn, ethanol and gas have dropped by 8%, 2.5% and 4.5%, respectively. Lots of optimistic news, right? Now, let’s turn the key.

The world economy is a huge disaster and Brazil is following suit. As we said on our last comments, August and September will give us the exact dimension of the size of the consumption shortfall and what will happen later. The uncertainty about the path the market will take might have created an early purchase of spreads affecting the inclination of the price curve of NY. That’s just some conjecture. Only this week October/20 has appreciated 11 dollars per ton against October/21 and 20 dollars per ton against October/22.

What will the funds do with the long position, now estimated at 92,000 lots? Roll them over to March/21 and lost almost 60 points (13 dollars per ton) or just settle? An experienced broker in Manhattan thinks they will still add on more purchases and the market might go up about 50-60 points, but then what?

What is the most probable scenario for the sugar market down the line: a) the tax reform, though far from being ideal, has decreased the volatility of the real and some financial institutions assume that by the end of this year the quotation of the American currency will be at R$5.0000; b) the drop in fuel consumption, given that people are working at home and that the economy is shrinking, doesn’t point to oil quotations above 40-50 dollars per barrel; c) the American elections will bring huge volatility onto the market. Trump has already stated that he won’t accept the result of the elections (if the ballots boxes aren’t favorable to him), so we can expect great turbulence, especially because the attacks on China, the greatest culprit of everything, according to his voters, will continue; d) India will export between 5.7 and 5.8 million tons of sugar in the crop starting in October/20 and would be happy with NY above 13 cents per pound for them to fix; e) declining sugar consumption and high carry-over; f) gas price in Brazil smaller in real per liter putting pressure on ethanol parity.

It’s really hard to stay optimistic, given that it’s impossible to try and create something positive out of such a bad scenario, or as the popular saying goes, “You can’t make chicken salad out of chicken sh*t.” Mills must fix prices that are profitable and industrial consumers must be patient when shopping.

Good news for those who were waiting on the resumption of our courses: registrations for the 34th Intensive Course on Futures, Options and Derivatives – Agricultural Commodities are already open. In Portuguese only. The course is now online and live and classes will be in the first two weeks of September. Click on https://youtu.be/YyoR2BcpyI8 for further information. We are considering a course in English if there are enough candidates.

Have a nice weekend everybody.

Arnaldo Luiz Corrêa


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Receives weekly comments from the market