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“If you can’t spot the sucker in your first half
at the table, then you are the sucker”


The sugar futures market in NY closed out Friday with March/2021 trading at 14.22 cents per pound, a positive variation of 65 points, or about 14 dollars per ton. As the real appreciated against the dollar by 2.75% in the week, the price variation in real per ton was only R$5 on average for the 2021/2022 crop and R$6 for the 2022/2023 crop.

Texas Hold’em is one of the most popular variants of the poker game. Each player is dealt two cards and can use another five community cards. After the cards have been dealt among the players and the first bet has been made (who’s in?), the croupier shows the Flop, which is made up of three community cards. Now each player compares the Flop with his cards and analyzes the possible combinations in order to carry on or not in the game and, if necessary, make his bets. The fourth community card is the Turn followed by more bets. Finally, the last card, the River, is followed by the last round of bets.

The current sugar market bears some resemblance to Texas Hold’em. The two cards the mills “are dealt” represent their sugar and ethanol production. Then there is the Flop, the three first community cards, which symbolize the common tripod of every mill and which are well-known by every commodities trader: the ability to negotiate the commercial contract (the basis), the hedge of the product at the corresponding futures exchange and the currency hedge. And then, of course, the possible combinations within the competence of each company determine who is doing well in the game.

Doing well in the game suggests the mills have focused on the profitability of their operations and haven’t missed out on the opportunity to fix their export sugar. And they have done that in an orderly way breaking the record of fixed percentage for a crop which hasn’t been croped or crushed yet.

To illustrate, during September/2020 the mills price-fixed a volume of about 1,625,000 tons of sugar for expected shipment for the 2021/2022 crop. So, the estimated sugar priced for the next crop is 8,125,000 million tons of sugar at the average price of 12.38 cents per pound, without taking into account the premium of polarization. The average value of the accrued fixation in the crop is R$1,495.39 per FOB Santos ton (with pol).

After the Flop, we still have the Turn and the River. These two cards can completely change the game. They would be the expression of exogenous factors that get out of our control right when we are focusing on the market and on the many possibilities of return that our businesses provide. There are many playing cards.

But these two random cards express the excess of factors that are crucial for the final outcome and make it possible for the mill to win the pot. They are the fall in the world consumption of sugar and fuel, the first affecting the building up of a world surplus that would pressure prices; the second affecting hydrous pricing; the real devaluation against the dollar that depends on Bolsonaro’s government ability to implement reforms, the continuation of India’s subsidy policy that faces a fiscal deficit of 13.7% of the GDP, the actual effect of the drought on the next crop, among others.

And what role do the funds, which today hold a long position of 220,000 lots and which represent more than eleven million tons of sugar, play in this game? The fund is the greatest bluffer, a constant presence at every poker table. He’s the guy who will bet more than he’s been doing making his opponent (the mills) run away from the game. The logic (the fundamentals of the market) now shows some exaggeration in the price trajectory.

Now, a market that trades at a present value of R$1,694 per ton for the average of the 2021/2022 crop (maturity May/2021 until March/2022) can only prevent the mills from giving an all-in (a situation in poker where the player bets everything on a hand), that is, fixing as much as possible, if they believe in bluffing.

So, let’s take a look at the numbers. From January/2011 until now, except for the 2016/2017 crop which was totally atypical, the average nominal price seen over the period was R$1,040. Therefore, the current nominal value of R$1,683 per ton mentioned above, is the greatest out of 99.8% of the days seen over the period. If we want to adjust the values by the IGPM (General Index of Market Prices), it is the greatest in 77.8% of the times.

Of course, we will never get rid of the black swans. If there is the possibility for these sugar prices in NY to go up even further, the recommendation is to fix the export sugar in real per ton and buy out-of-the-money calls at the exercise price about 200 points above the fixed level on the market in NY in cents per pound. An insurance which will cost, according to Friday’s closing, about 45 points (equivalent to R$55 per ton of disbursement, but that can partially return when the insurance isn’t necessary anymore).

The funds can keep increasing prices, though the fundamentals say the opposite; after all, we have already seen this movie before and even having it rubbed in our faces, we look the other way. The latest occurrence was in late 2016 when sugar was trading close to 24 cents per pound while hydrous was traded at 800 points of discount against sugar, which alone showed something was off. Today hydrous is trading at 300 points of discount and it pays to keep an eye open.

The absence of a government plan scares the foreign investor away. Just as a curiosity, Lula’s first term reported a 14% annualized volatility of the dollar; in Dilma’s first term, the volatility dropped to 13.7%; in Temer’s “buffer term”, we experienced 15%. With Bolsonaro, it went up to 17.5%. That is, the risk perception of the market has never been so bad. in

Registrations (limited in number) for the two courses launched by Archer Consulting, totally online and live/pre-taped, are already open. One of them is the Essential Course on Futures in Agricultural Commodities, which will be held from November 23 to November 27 and is destined for those who need essential knowledge about commodity market operation; the other is the Advanced Course on Options in Agricultural Commodities from November 30 to December 4. Both will be from 5:00 pm to 7:00 pm through Zoom® and taped for future review. For further information, email us at priscilla@archerconsulting.com.br WE ARE PLANNING TO OFFER OUR ADVANCED COURSE IN OPTIONS IN ENGLISH NEXT YEAR (FEBRUARY OR MARCH). WHAT DO YOU THINK?

Have a great weekend.

Arnaldo Luiz Corrêa

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Receives weekly comments from the market