The sugar futures market in NY behaved reasonably well this week. The contract for March/2024, the most liquid now, closed out the trading session this week at 27.32 cents per pound, an accumulated increase of just 16 points compared to last week, that is, a little more than 3.50 dollars per ton. We are confident that the current week will be an important milestone for the trend of the prices, especially in view of the physical delivery against the maturity of October/2023, which will occur next Friday.
One thing caught our attention: the futures contracts in NY related to the 2024/2025 crop of the Center-South closed out the week virtually unchanged, with an appreciation of a little over a dollar per ton, while the next crop – 2025/2026 – appreciated 9 dollars per ton on average. Why does that occur?
In our opinion, the prices of the NY closing from March/2024 to March/2025, converted into real per ton based on the NDF (Non-Deliverable Forward) curve, and using the average curve of the IPCA (Inflation), show a net present value of R$2,833 per ton.
If we look at the normal distribution curve of these prices adjusted for the inflation since January/2000, which Archer Consulting keeps in its database, we will find out that in just 7.5% (on the average for the five mentioned maturities), NY prices have been above this level. That is why we keep recommending that the mills continue fixing export sugar prices for this period.
For the following crop, from May/2025 to March/2026, we have said that prices in cents per pound have the potential to increase since the average closing price of these contracts a few weeks ago was below 20 cents per pound. We advised industrial buyers to hedge against a possible rise of these contracts. Well, over the week, their average appreciation was almost 10 dollars per ton. In our opinion, the prices of the 2025/2026 crop have the potential for a increase of at least 150 points. Why?
The mills were surprised by the production increase this year and by the productivity improvement. “That’s a lot of sugarcane”, as a mill owner told me. Some companies are worried about not being able to crush everything they have produced, which forces them to sell sugarcane to some neighboring competitor.
Well, if the sugarcane volume this year has been so good that its surplus must be sold, the sugarcane field renovation – usually 1/6 of the area – might not be a priority anymore. This might jeopardize the 2025/2026 production. There is no question that all this is still premature; however, our recommendation is not to fix export sugar prices for May/2025 onward. If there is an urgent need to fix sugar selling price – especially for the mills that invested in sugar mills and want to guarantee a minimum remuneration to pay for the investment – they should at least fix prices together with the purchase of an out-of-the-money call to hedge against a possible recovery of the sugar.
One of the greatest challenges in the decision-making process for the mills – especially when choosing between fixing and not fixing future prices – comes from the information volatility caused by news agencies. Even before the start of the 2023/2024 Indian crop, which is supposed to start in October, smaller and smaller projections about the sugar production in India are already circulating. What is intriguing here is that these estimates appear with an accuracy level that goes to the third decimal place, even without the first sugarcane having been crushed in the country. In contrast, in Brazil, where more than 60% of the crop has already been processed, we still face difficulties in coming to a consensus about the production estimates. I admit I do not know what the logic is.
Regardless of that, as Michael McDougal – this Jedi master on futures markets – from PGM reminded us on his daily comment, in September/2009, a little before the start of the 2009/2010 crop of India, the market embarked on a narrative according to which that country would import sugar in 2010. That made sugar futures prices in NY go up to the stratospheric level of 30.40 cents per pound in February/2010, and then, see the market shrink to 13.00 cents per pound in May, that is, in a little more than 60 trading sessions the futures market in NY plummeted 57% – the greatest sugar meltdown in a quarter since 2000. For the sake of comparison, during the pandemic, the sugar meltdown over the same period was “only” 38%. And you think the rollercoaster ride at the amusement park was exciting!
Fanning the bullish sentiment, the non-index funds increased their total long position based on the COT (Commitment of Trades), published this Friday by the CFTC, based on the data found last Tuesday compared to the previous week. Now the funds hold above 198,670 long contracts, equivalent to 10 million tons of sugar.
It is worth noting that the ICE, the sugar futures exchange in NY, chose to keep the collateral margins unchanged despite the notable market rise. This inaction does not contribute to mitigating the meaningful volatility risks, usually driven by the funds, which can result in liquidity restrictions for the trading houses and even threaten the stability of the sector. An adjustment to the collateral margins could encourage the funds to deleverage their positions.
Let us see what is in store for us next week. As Keynes would say, “It’s better to be roughly right than precisely wrong.”
You all have a nice weekend.
Arnaldo Luiz Corrêa
