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Sugar

DON’T KILL THE MESSENGER
30/04/2021

Receives weekly comments from the market







The sugar futures market in NY watched the boring expiry of the contract due in May/2021 this Friday. The physical delivery was 576,000 tons, with 99% from Brazil. No surprise there. The July/2021 contract – now the most traded one – closed out the week at 17.06 cents per pound, 18 points above last week’s closing and appreciating almost four dollars per ton, but due to the recovery of the real against the dollar ($5.4370) closed out unchanged in real per ton. The closing averages of the contracts for the 2022/2023 and 2023/2024 crops closed out R$10 down per ton in the week.

The week was rather busy and made the bulls smile when the market approached 18 cents per pound. But, with the release of the COT (Commitment of Trades) today, one can see that the funds have added on more than 30,000 lots during the week (Tuesday to Tuesday). That is, the market has a whole lot less fundamentals and much more new money coming in.

Last week, using the same criterion of the CFTC the funds increased the long position by 50,300 lots and drove the market up by almost 30 dollars per ton. This week, the funds increased the position by 30,000 lots and moved the market by almost 28 dollars per ton. The funds need fewer and fewer lots to move the market by US$1 per ton. What does that mean?

Of course, they cannot find new sellers because – as everybody knows – the mills are at the percentage limit of sugar fixation for the crop that is starting. I don’t know to what extent the models and algorithms perceive and/or incorporate that, but at any rate, they are being helped by the fear on the part of the mills and trading companies that they cannot turn a blind eye to the explosive combination involving a possible delay or even reduction in sugar availability, a worsening in cash flow due to margin calls and, last but not least, a default on the part of the mills with serious financial problems.

But calm down, don’t kill the messenger. Though the above scenario might seem catastrophic, there is no imminent risk right now. We have to keep an eye on the developments. Our attention is drawn to the fact that this week the open position both of puts and calls have gone up 12,000 lots, which shows that the market players seem to notice that we are at a turning point, that is, that very moment where the market can blow up or melt.

There is consensus on the market that the sugarcane crop in the Center-South is delayed. The number released by UNICA supports that. The volume of crushed sugarcane over the first two weeks is 30.57% smaller than that of the same period the previous year, but that doesn’t mean that the loss will be as big as that. Some mills admit they are holding off on crushing so as to give more time for the sugarcane to ripen. I cannot say if it’s a 30-day delay, as a couple of traders are pointing to, but anyway, the situation fits into a bullish narrative, fitting the funds like a glove.

Since 2000 only seven times has the average daily closing price of the sugar futures contract in NY in April closed out above the average price seen in March. This year has been one of them. With the expiry of the May/2021 contract, the average price seen this month was 16.25 cents per pound, 35 points above last month’s average. In four out of the six last occasions where this has been seen (2000, 2004, 2009 and 2019), the highest average of the year occurred in the last quarter of that year. In short, there are 2/3 of chances that the market will have new highs in October-November-December. I wonder.

There are still reasons to doubt this thriving market: the lack of activity on the physical market; the fact that even with delay – an executive from an important mill told me – the trading company didn’t even care about that, which goes to show that there is no urgency for sugar that the futures might want to cause; the spreads don’t reflect any agony, to mention a few.

Taking advantage of the good prices in real per ton for export sugars for 2022/2023 and 2023/2024 continues being a great option. We always choose this alternative together with the purchase of a call 200-250 points above the market at the fixation moment.

Even in the disastrous, corrupt and infamous PT governments, we had ministers who were knowledgeable about the offices they held. Paulo Guedes is so mediocre when he makes irrelevant comments about China, Brazil’s greatest trading partner and main vaccine input (which we don’t have) supplier.

A few weeks ago, sociologist and political scientist Bolívar Lamounier wrote a flawless article in O ESTADO DE SÃO PAULO newspaper pointing out that we have never had a situation in Brazil where the three branches of the Republic were held by such mediocre and unqualified people.

The effects of the CPI set up this week can be disastrous to the country. To believe that the real will continue to be in this hassle-free scenario where there are still so many hurdles to be overcome before the 2022 elections is like pushing our luck – especially when we are aware of the investors’ bad humor in relation to Brazil, or even foreign institutions that cannot lend money to countries that – according to them – are destroying their biomes.

You all have a good weekend.

Arnaldo Luiz Corrêa

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Receives weekly comments from the market