The sugar futures market in NY had an amazing performance this week, closing out Friday with the contract for October/2020 trading at 13.10 cents per pound, an increase of almost 11 dollars per ton against the previous week.
As the Brazilian currency ended the week at the same value as the previous period against the dollar, sugar values in NY converted in real went up by R$40 per ton for the 21/22 harvest and R$26 for the next harvest. For shorter maturities, the appreciation was more than R$50 per ton in the week. October/2020 closed out Friday at R$1,633 per ton.
Several theories come along to justify the more robust sugar prices and every analyst picks the story that suits them best. So as not to make the same past mistakes, when we saw mills keep from fixing export sugar prices at totally profitable levels in the vain hope that the highs would go on indefinitely and, since we know there is no way we can predict the future, the best thing to do is hold on to what we actually have right now rather than drown in endless lucubration. That is, price-fixing is a good strategy. Why, though?
For the last ten years, in only 1.36% of the events, the value of the first maturity in NY was above R$1.633 per ton (nominal value). In adjusted values by the IGPM (General Market Price Index), only 1/3 of the times; for the last five years, only 2.73% of the times in nominal value; now, in adjusted value in 28.5% of the times. But even so if the mill doesn’t feel safe, it can purchase an out-the-money call at the exercise price that comes close to the mentioned nominal value from 10% to 20%. Talk to your risk consultant.
We objectively believe the improvement on prices on shorter maturities is first due to the temporary movement of immediate purchases of end consumers with the expectation that the harmful effects of the covid-19 pandemic in the economies will ease up and, if that happens, they will be already prepared to meet the consumer market. This fact hasn’t just happened to sugar, but to other commodities as well.
However, as far as sugar, the funds are long by a meaningful volume and the number of the CFTC shows that they are long by 151,474 lots. In our opinion, as we have said before, the funds have a vulnerable position.
Secondly, the price curve in NY is under huge pressure on the longer maturities because the devalued real encourages the mills to increase their pricing volumes. This week, as we have said, October/20 has appreciated by almost 11 dollars per ton, while the maturities for the 21/22 harvest have appreciated US$ 7.25 per ton on average and just US$ 5 per ton for the next harvest.
Thirdly, let’s not forget that the purchases on the futures market have been motivated by algorithms (system buying), little robots that identify opportunities based on ingenious mathematical structures fed by a plethora of data and correlations, while you, on the other side of the desk, look at a screen trying to guess “what the heck is going on”. That’s as scientific as it gets.
Over five months, the spread between October/2020 and October/2022 opened 30 dollars per ton, that is, the shortest maturity appreciated against the longest maturity. And that has huge influence on the dollar appreciation, which in March was trading at R$4.8900 on average and in August is at R$5.3800.
Can the market still go up in cents per pound? We believe it can in the short term. Short term here defined as until October’s delivery. As we’ve said before, August and September are crucial months for us to better understand the extension of the global consumption shrinkage.
Some economies are returning to normal. There has been a huge fall in tax collection (see the United Kingdom and the Euro Zone), China is rebuilding its strategic stocks, Indonesia has started shopping and there are doubts about the renewal of the Indian subsidy. According to fundamental analysts, the fact that Brazil is reasonably well pricesand that a possible speedy movement of purchases in NY might not find buyers can also affect prices. To me, this is the weakest argument.
The funds purchased 54,000 contracts and moved the market by weak 75 points. Assuming that they might have that huge past long position again, which was 220,000 lots, that is, if they wanted to reach this record again, in thesis, the market would have enough breath to go up another 50-70 points.
In order for the market to make it at prices around R$1,600 per ton, we need to rely on a series of extremely favorable coincidences. We will monitor and stay pretty alert to movements. But it’s good to keep in mind that the export physical market, despite the long line of vessels in Santos, isn’t reflecting that on basis, which are weaker. There is a lot of noise getting in the way of the decision making process.
Registrations for the online and live 34th Intensive Course on Futures, Options and Derivatives – Agricultural Commodities are still open. Classes (Portuguese only) will be held in the first two weeks of September. Click on https://youtu.be/YyoR2BcpyI8 for further information. Spots are limited and you can pay in up to 10 installments.
Have a nice weekend everybody.
Arnaldo Luiz Corrêa
