The sugar market in NY challenges our intelligence all the time and when we cannot find enough reasons to justify sudden price changes, it’s easier to adjust the rhetoric of the facts to the quotations that shine on the screen.
March/2021 came pretty close to 18 cents per pound, a level that not even the most optimistic trader could imagine seeing being traded. And there are plenty excuses for it: lack of sugar on the planet, drought in the Center-South, crop delay, a shortage of container availability, among others. All this happening when a greatly renowned trading company puts a global sugar surplus between 6.8 and 7.0 million tons for the 2020/2021 and 2021/2022 crops combined.
The shrinking of white sugar availability in the world promptly made London go beyond 480 dollars per ton and strengthens the demand for raw sugar pushing the NY quotations to the levels they’re at. March/2021 closed out the week at 17.89 cents per pound, after touching on 17.96, the highest level since March/2017.
So, we gather all the fundamentalist and technical factors and immediately validate the market highs and leave the door open to the possibility of it going higher and higher – especially now that we are going through a new virtuous cycle of commodities, according to some experts.
Just as a reminder, the last cycle of commodities was at the start of this century, when China grew two digits per year for almost a decade. It turns out that the commodities that benefited from this virtuous cycle were the energy (oil hit 138 dollars per barrel), metal and grains. The soft commodities varied little over this abundance period.
On October 30, 2020 we made the following comment about the scheme that had been shaping for more than 100 days, “the market shift favors the rollover of the long position of March since, when the fund does that, it will be selling March at higher prices than the new purchase in May, generating a realized profit in its portfolio. The rumors that a trading company would also be buying the March/May spread heavily in order to benefit its sugar position in the physical in case of a delivery on the next maturity help the strategy of the funds even further. Hypothetically, the trading company could have triggered the purchase of the March/May spread at 50-70 points and when it came to 80-100 points, it sold twice as much. That way, the net result of the strategy is the same as selling the spread at 120 points”.
The strategy above must have generated a huge profit to whoever developed it and – in our view – the behavior of the March/May spread, and the increase in prices was mainly motivated by the fight among the major spread players (the market knows who they are). After the March delivery we might have some sugar price accommodation in NY.
When I was writing this report, I heard the news that Bolsonaro had fired the CEO of Petrobras. This is a black swan that can change the trajectory of sugar prices and can be a heavy blow to the sugarcane sector.
Over the recent Republican history of Brazil there has never been a greater embezzler sitting as president like Jair Bolsonaro. Nothing he promised in his presidential campaign has been delivered. He hasn’t bothered presenting projects for the political, administrative and fiscal reforms. He dressed up like a liberal and promised “less Brasília and more Brazil”, with minimum state interference. He hinted at privatizations and spending cuts. He used the flag of zero tolerance against crime and unconditional support to Lava Jato (Operation Car Wash). He used the image of Sérgio Moro to promote himself and, as it always happens when someone overshadows him, destroyed the minister. His villainy is now crowned with the ousting of Petrobras CEO just because the company, which exists to make profit, follows oil international prices passing them on to the consumer. Bolsonaro’s unpreparedness is so big that he ignores that within consumer price 53% refers to oil price on the world market converted into real and the other 47% are fees/taxes and trade margin of gas stations and dealers. There is strong evidence that the sugarcane sector will indirectly end up paying for another of his villainy. The state-run company will certainly abandon the pricing transparency policy and all the brilliant work started by Pedro Parente, whose control made the company profitable again after four years in a row of losses, will go down the drain. Foreign investors should abandon the country while this mentally unbalanced president is in office.
It’s discouraging.
Have a great weekend everybody.
Arnaldo Luiz Corrêa
