The global commodities market experienced a sharp change in attitude that quickly turned the gloomy mood it was in into a bright and uplifting environment, positively contaminating all the soft commodities. And among them, of course, sugar. The main issue is the eternal difficulty we have to make out the object ahead of us in the middle of the fog.
The sugar price increase over the week, with NY closing out at 16.64 cents per pound for the contract maturing in May/2021 (more than 100 points of positive variation), contradicts the economic perspectives, especially those in Brazil.
The political and economic scenario of the country gets worse with the opening of a CPI (Parliamentary Investigation Committee) which most importantly aims at investigating the performance of the Federal Government with regard to the Convid-19 pandemic. Everybody is aware of the President’s denial all through the pandemic in addition to his disrespecting the grieving families. And nobody else but him provides his opponents with so much ammunition whenever he opens his mouth and makes those off-color lives confronting science and good customs.
The market is working with a smaller and smaller GDP growth each week. In the Focus Bulletin, the GDP forecast for January this year was 3.50%; today, it is 3.08%. MB Associates believes in a smaller GDP: 2.60%.
The strictest part of the Brazilian business community is avidly looking for alternatives for the 2022 elections, especially now that Lula is free to run again for president and turn Brazil into a kleptocracy. We are stuck in a hole without much hope to get out. A senior analyst says that Lula goes in to win, that is, if there isn’t absolute certainty he will, he drops out of the race.
When all these pieces are put on the table, it gets hard to be positive about sugar in cents per pound. New unrest that will be caused by the CPI to be installed from next week on, a fiscal budget that is feasibly difficult and will hardly be passed by the Congress will make room for a greater weakening of the Brazilian currency against the dollar. The impact of all this on commodities (coffee and sugar, mainly) will be immediate.
The domestic consumption of fuel and food depends on the vaccine and consequent and long-awaited economic recovery. The devalued real puts a support on imported gas price and, therefore, helps ethanol. There are still other gear components missing, though.
The fact is that the sugar futures market in NY has gone up and its participants need to look for a fundamentalist narrative that justifies such increase. They can start out by stating that more and more people believe that the Center-South crop can plummet to 550 million tons of sugarcane due to the water deficit in the sugarcane field. They can also state that the mills are well-fixed and that the market won’t find liquidity in a possible increase, because those who could sell are already short. Two elements that would be even more catalytic could be added to this explosive vision: the margin call which would feed into a high trend (we spoke about this here a few months ago) and the repurchase of fixed sugars due to a smaller than expected production.
On the other side of the globe, there is India going through another lockdown due to the significant increase in Covid-19 cases during the week (they came to 200,000 in just one day) while the export records speed up rapidly. That is, Indian sugar continues moving toward the foreign market. Besides, Thailand should produce an extra 3 million tons of sugar in the 2021/2022 crop. It doesn’t seem like there is a shortage of sugar in the system right now.
CFTC (Commodity Futures Trading Commission) released a report in which the non-indexed funds bought 22,400 lots in the week (from Tuesday to Tuesday). That is, the market strongly went up influenced by algorithms, purchases of systems, robots, among others. Nothing has changed as far as the fundamentals go over the last week that could validate all this bullish movement.
When in doubt, it’s always good to fix prices. Indeed, the number collected by our model for the fixations of the 2022/2023 crop was surprisingly low. Obviously, models make mistakes, but if we look at the growth in the open position in the trading months which make up the mentioned crop (from May/2022 to March/2023), our estimate looks pretty consistent.
So, the mills are fixed by only 12%, which represents a little more than 3 million tons of sugar. The accumulated average price over the period (since September/2020, though this is the first release) registers 13.34 cents per pound, without taking into account the polarization premium. The average fixation value is R$1,696 per FOB Santos ton, equivalent to R$0.7383 per pound, both with the polarization premium. Those who fixed prices and bought out-of-the-money calls did a good thing.
A renowned executive from the sector, criticizing our last week’s comment, where we said that the recovery of the market sounded more like the chiming of the dead cat, argues, “not only is the cat not dead but it has also climbed up the roof and will kick those who have a short position”. Let’s see how long this cat will meow.
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The mega-swindler Bernard Madoff, the man who was able to trick financial institutions (with risk managers, market intelligence, compliance, among other essential activities) and important investment groups causing a loss estimated at more than 65 billion dollars, died this week. The fraud was discovered in the 2008 crisis. Madoff was sentenced to 150 years in prison where he ended up passing away at 82. He left us a great lesson: not to believe in gurus.
People would line up to invest with him. The minimum ticket to buy a quota in Madoff’s fund was 5 million dollars. How was this crook able to trick so many people for so long? Harry Markopolos, a former manager of the American funds, was the one who first alerted that the returns proclaimed by Madoff were “mathematically impossible”. In the vague information he gave the shareholders – all happy with their fictitious gains – Markopolos concluded that even if Madoff could soften the great fluctuations of the indicators of the American Exchanges, in order to get earnings of 1-2% 96% of the times every month, he would have to have multiple billions of dollars in options, a much greater volume than what the market itself could offer. It was as clear as day.
As we know, gurus, myths, messiahs, snake charmers, among other freeloaders, are characters we come across from time to time in all human activities. Many times, when we finally recognize them, it’s already too late.
You all have a great weekend.
Arnaldo Luiz Corrêa
