Bingo! As we said here last week, the market was close to a confrontation between the long term’s Dr. Jekyll and the short term’s Mr. Hyde, the former showing a bullish side which fought back the bearish setting of the short term. A strange case of multiple personality like the abovementioned Robert Louis Stevenson’s characters.
The pretty strong start of the sugarcane harvest in the Center-South creates an expectation on the market that everything is fine and will stay like that forever and ever. The funds built a huge long position which reached the record of the 234,000 lots according to data released by CFTC based on last Tuesday’s open position, and must have settled part of them on Thursday’s collapse.
The futures market ended up closing the week with July/2016 at 15.74 cents per pound, a 58-point fall against the previous week’s closings, or about 12.75 dollars per ton. All months closed at a negative variation with shorter maturities, which had falls between 8 and 11 dollars per ton, while the longer maturities (from May 2017 on) had falls between 4 and 6 dollars per ton.
This was a really unsteady week, with a 125-point interval between the low and the high and the premium of options reflecting a larger volatility against last week’s by about 1.6%. That is , the market participants pay more to protect themselves because they see a larger risk of oscillation in the quotes. It has been the largest oscillation in a week since the funds long liquidation late last Februray, when the market had a price interval of 199 points.
Those who use options as a hedge substitute with futures adequately (using delta hedging and observing and controlling the Greeks) have the opportunity to pocket a nice amount of the 15 dollars per ton of time value which are “available” in the at-the-money options (those whose exercise price is close to the market) for July/2016. It’s a lot of money to be overseen by the money managers. What I always hear at the companies is, “Ah, options are too risky”, “controlling derivatives is too complicated”, or “Ah, this brings in a problem for the accounting and controlling”, and other reasons. Actually, making money with discipline is a lot of work. Losing with badly-structured operations is a lot easier.
Even with the price fall in the week at about 13 dollars per ton, the closing in real had a small fall: R$1,265 per ton against R$1,275 last week. These are details that make a difference in the trajectory of prices.
Will the market bounce back next week? Well, the funds are pretty long and we never know when (level) the sales started by computer systems can come in and do to the market. I believe only exogenous factors to sugar can contribute to the price fall. For instance, an eventual fall of the oil barrel which damages the arbitrage of ethanol internally. It’s very important to remember the new government – which should take over on Friday after the Senate has ousted president Dilma – will try to keep the real more devalued to increase exports and this may pressure sugar. A 3.6500-3.7000 rate keeping the values in real constant (R$1,250) can knock down the market in NY another 100 points (to about 14.80 cents per pound). This is the largest bearish flag fluttering in the playing field.
However, steep falls close to this level (14.80) would be a great buying opportunity for the second semester, or more conservatively, the last quarter of 2016, because until then we will have a more realistic picture of the sugar availability in the world.
Over the last twelve months, the Brazilian currency has devalued 14% against the dollar. Thailand and India devalued 7% and 5%, respectively, against the American currency. So, the production cost in Brazil (Center-South) is still much lower than that of its direct competitors. In Thailand, our cost estimate at the mill is 15.43 cents per pound while in India it is 25.53 cents per pound. In Brazil’s Center-South, the cost of the mill, according to Archer’s calculations, is R$51.59 per bag, at least 270 points cheaper than in Thailand.
Brazil will stop getting worse from next week on. It’s not a lot, but that’s what we have right now. Getting rid of Dilma, Lula and PT (Workers’ Party) is already a huge relief. A lot will have to be done to get Brazil back on track again as far as development, ethics and values that have been lost through 13 years of this gang’s government. There are still a lot of bad guys in the National Congress and the cleansing has just started. Lula, who has finally been reported by the Attorney-General as the head of the criminal organization that together with several politicians, companies and contractors ripped off Brazil with his power project, is done with. His obituary can be written. Let’s wait for this great national moment of happiness when we will be able to watch this conman being locked up along with all his infamous friends. There won’t be enough jail room for so many outlaws.
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You all have a nice week.
Arnaldo Luiz Corrêa
