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Sugar

PRETTY CLOSE TO EXHAUSTION
04/09/2020

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“It’s a recession is when your neighbor loses his job;
it’s a depression when you lose yours.”
Harry Truman (1884-1972)
33rd President of the USA
 

The non-index funds are still heavily long on the sugar futures market in NY at almost 191,000 lots, equivalent to 9.7 million tons of sugar, according to the report published by the CFTC (Commodity Futures Trading Commission). As we have observed here for many weeks, our opinion is that the position of the funds is vulnerable.

The sugar market has already shown signs of this vulnerability. The contract maturing in October/2020 closed out this Friday at 11.93 cents per pound, a 67-point drop (14.75 dollars) against the previous week’s closing. March/2021 followed suit and closed out at 12.61 cents per pound, a 13.50-dollar drop per ton in the week.

To make the situation even worse, at least from the perspective of export sugar pricing on the part of the mills, the real appreciated by 1.60% against the dollar, closing out the week at R$ 5.2998. With this combination of events, pricing for the next October/March period plummeted by about R$103 per ton. On average, the closing prices of sugar in NY converted into real have shrunk R$57 per ton in the 2021/2022 harvest and R$22 per ton in the 2022/2023 harvest.

It’s more than likely that the sugar market on the mid-term, defined here as the next six months, will stay limited to a boring price interval between 11 and 14 cents per pound. How wide a damage the funds can put the market through if they decide to totally or partially settle the huge long position they have isn’t known yet. The true magnitude of the damage to sugar consumption around the world caused by the pandemic and its impacts on the next months is also under the radar. These two events can promptly make the market cross these frontiers.

It’s worth remembering that with sugar being under 11 cents per pound all Brazil’s direct competitors – even Brazil itself – stay away from the foreign market.  Few companies in the Center-South would be able to export sugar with a positive margin at this price level. That is, buying sugar futures at 11 cents per pound or even selling a put at this strike price is a no brainer.

As a counterpoint, in order to see sugar trading above 14 cents per pound would take some break in the supply of the product, or an oil price boom, which given the current situation caused by the pandemic defies logic.

Energy market analysts believe it to be unlikely that oil can go beyond 60 dollars per barrel within the next two years. On the other hand, the increase in minimum sugar price in India and the possible export subsidy renewal starting next October 1st make the NY-based level of 13.50-14.00 cents per pound a great and profitable opportunity for India to unload between 5.5 and 6.0 million tons of sugar on the world market.

What’s striking about what’s coming up our way is that the pandemic will reduce sugar consumption around the world after Covid-19 has been around us for its first year. I say that because by looking into the evolution of the average world consumption over the last five years, we come across a small average growth of 0.46% per year using the USDA data. How low will this be after the numbers reflect the recession to its full extent?

Likewise, over the same five-year period, the world production has grown by 1.85% per year. Broadly speaking, we’re saying that under normal conditions (without any climate shocks) the world has been piling up 2.35 million tons of sugar every year. The ratio between world stock and consumption will increase and pressure sugar prices.

Brazil’s edge, however long it might last, is that the real has strongly devalued by 32.2% against the dollar in the year accumulated, while raw sugar in NY has dropped by 11% only. That is, if on the last trading day in 2019 the closing of sugar in NY was at R$1,239 per ton, today it is 18% higher. It’s no wonder the mills with management skills and/or favorable cash flow did as they pleased on pricing, not missing out on any opportunity to pocket the extra 18% in real per ton the devaluation of the currency allowed for.

Based on the option open contracts published by ICE, it’s worth noting that from last Friday to Thursday this week the demand for puts, that is, for protection against falling price has increased by 466% – from 4,200 lots traded on Friday to 23,900 last Thursday. The market is worried about further drops down the road.

There’s no point in just looking at the world sugar consumption. We have to carefully look at how per capita consumption in every country is behaving. And the numbers are not at all reassuring. We’ll talk more about that next week.

I wish a nice extended holiday to everybody.

Arnaldo Luiz Corrêa

 

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Receives weekly comments from the market