The sugar futures contract in NY for October 2023 closed out this past Friday, setting a record for the largest physical delivery in the history of the contract. It consisted of 56,473 lots, amounting to 2.87 million tons of sugar. October 2023 ended its cycle at 26.24 cents per pound, reflecting a cumulative 73-point drop over the week, equivalent to $16 per ton
March 2024, the next maturity, closed out on Friday at 26.51 cents per pound, posting a 77-point weekly decline, equivalent to $17 per ton.
Such a large delivery embodies all the bearish factors typically outlined in academic literature when referring to the seller of a commodity finding its physical delivery against a short position at the exchange as a last resort.
He does that just because – in theory – he did not find a buyer who would pay better or, as it might happen in some cases, does not have the product at this moment and counts on the buyer’s sluggishness (the one who will receive his product via exchange) to nominate the ship. Why does he do that?
As you remember, the October/2023-March/2024 spread traded at 45 points of premium for some time during May, that is, October was worth 10 dollars per ton more than March/2024. Now, at the end, it was trading with a 30-35 point discount. A competent trading company always keeps its eyes on the spreads for discrepancies between the vision it has on the physical market and what is being traded in the future. Taking advantage of these distortions is part of the day-to-day life of the trading company.
Hypothetically, if you felt back in May that the Center-South would have a strong sugarcane crop contradicting what the spread in NY was showing, what do you do? Sell the spread and wait to see if your perception that the Center-South crop would be phenomenal checked out. If so, you keep your short position (October/2023) all the way and deliver the physical sugar. In other words, even if you do not have sugar to deliver right away, you made about 16 dollars per ton – the difference between the spreads – to meet potential demurrage costs (due to the delay in the loading of the ship) if the buyer nominates the ship faster than you can move the product to the port.
Regardless of how the scenario plays out over the next weeks, the fact is that the sugar deliverer chose this operation exactly because they did not have a destination and/or did not find anyone who would pay a better premium. Therefore, such a large delivery will hardly go unscathed by the market.
What supports the market at the current levels, however, is still what the funds can do. But some new components come into play to bring on more excitement: the funds sold 11,641 lots over the week, but still have long 187,000 lots, though the market performance over the last days show that they probably sold a little more.
Another component will be the narrative about how fast the nominations will happen. But when a situation like this presents itself, the immediate impact is on the basis, that is, how much the available sugar for immediate shipment will premium trade if the seller does not have the product. It will not necessarily have an impact on NY.
The salvation of the bulls depends on India, although the perspectives for sugar production of the country improved after the good rains this month, according to the Food Secretary himself, Sanjeev Chopra. For the bulls’ despair, in an event in New Delhi, he went on to say that “India isn’t facing any sugar deficit”.
A respected market trader confided to me that he was pretty confused about what was going on. The delivery had stunned him. I asked him why and he then told me that a few weeks ago he participated in a seminar sponsored by a trading company and that a bullish cloud was hovering over the event whose lectures showed NY was inexorably going towards 30 cents per pound. I argued, “All right, we are all entitled to have an opinion about any subject”. He said, “Yeah, but they delivered sugar at the exchange and I’m feeling like a clown”. I said, “Just let it go, dude. That’s life”, right when I noticed that he was shyly hiding a latex red nose in his pants pocket.
You all have a nice weekend.
Arnaldo Luiz Corrêa
