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Sugar

THE OTHER SIDE OF STORY
16/10/2020

Receives weekly comments from the market







 

“Never buy a stock because it has had a big decline from its previous high.”
Jesse Livermore (1877-1940)
Stockbroker

 

The sugar market in NY tried hard to break the 14.50-cent-per pound level during the week, but to no avail. It ended the week with a contract maturing in March/2020 at 14.45 cents per pound, with an 87-point appreciation, equivalent to a little over 19 dollars per ton. All maturities closed out in a positive territory.

The dollar, in turn, lost strength on Friday and closed out the week at R$5.6525, a 0.5% decline compared to the previous week. During the week, the average sugar value in NY for the 2021/2022 and 2022/2023 harvest appreciated by 38 and 60 real per ton, respectively.

There’s no question that the bullish boost seen in NY has been supported by the long position of the funds (estimated at 244,000 contracts) stimulating the upward strength even further by means of the compulsive purchase of the March/May spread, and that of May/July as well, which narrowed by seven and five dollars per ton in the week, respectively. With the purchase, the fund fuels March’s high without adding directional risk.
 
The bullish narrative has among its key components the fact that India is taking too long to implement the subsidy program, the water deficit never before felt in various regions (some without any rain for 160 days), the drought and fires that have hit and are hitting portion of the area occupied by the sugarcane fields in the Center-South, the reduction in the Thai harvest and the significant volume of Brazil’s sugar export. But the other side of the story can be cruel.

For example, Europe with 700 thousand cases of Covid-19 last week taking a step back in the reopening the economy and the USA with a sensible worsening in the cases of the disease in most states. So, there is an increase in the fear of a second global wave of the pandemic which can cause enormous turbulence to the financial market and commodities along the lines of what occurred in that fateful first half of March.

Also, there is an extremely polarized American election along the way, whose result, regardless of the winner, can bring on a replay of the demonstrations and violence of radical groups with unimaginable consequences at this moment. It’s incredibly easy to make decisions, isn’t it?

We can’t afford to throw away the prices traded on the market. The current value of the 2021/2022 harvest is at R$1,724 and that of the next harvest is at R$1,622. Guaranteeing these prices is having a great result in the year for sure. And we can always participate in the high by buying out-of-the-money calls. 

The Archer Consulting model, as reported in the previous comment, shows that the total of fixed export sugar for the 2021/2022 harvest on the NY futures market is 8,125,000 tons, representing 32.5% of the estimated volume for the next harvest.

The number has been challenged and, since this is about a model, we can only try to identify the flaws in the model for future correction if applicable. However, when scrutinizing the calculation, we know that 40% of the financially healthiest mills have fixed 54% of the sales, while the remaining 60% have fixed only 18% of next year’s volume, especially because of credit restrictions.

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

 

Have a great weekend.

 

Arnaldo Luiz Corrêa

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Receives weekly comments from the market