A reader teases me saying in an email that “those who move in the opposite direction of the market end up running into a trailer truck”. Evidently the driver on the wrong way mentioned by the illustrious reader is me. He is referring to the fact that I “still” haven’t boarded the gravy train that the bulls are crying out for everybody to get on. The unfailing destination, according to him, is the thirty cents per pound.
I always get wary when markets change so quickly over such a short period of time without any new fundamentalist factor supporting it. I’m not and have never wanted to be self-righteous, but my advice is not to take it for granted that something is inexorable and indisputable. At least decades of experience have been good for something, simply because I have been through similar situations countless times. Always be skeptical, always ask. Stick to details.
Seven trading sessions were enough for the sugar futures market in NY to go up more than 250 points pushed by the somewhat warmed-over news that India won’t export one gram of sugar in the next crop that starts in October and that the world deficit caused by reductions in the sugar availability of Thailand is approaching six million tons. It sounds like a bombshell. And it was, at least for the end consumers (industrial consumers who use sugar as input for their products), who started fixing their purchases before the market revisits the price peak seen in April.
However, none of the participants linked to the sugar physical market were the ones who actually bought. The funds, according to COT (Commitment of Trades), report of the principals, published on Friday by the CFTC (Commodity of Futures Trading Commission), based on last Tuesday’s position, bought more than 30,000 lots (when this comment was written, we still didn’t have the exact number).
We have been saying here that the turning point in terms of price would be caused by the weather here and abroad, and also by a possible resurgence of the energy market. The Indian government’s concern over the inflation rate in that country is one of the arguments of the analysts for the exports to be banned pushing sugar prices down on the Indian internal market. The Indian inflation, according to The Economist, is estimated at 5.5% for 2023. It doesn’t look dramatic. However, in election years, the politicians love to resort to old populist tricks to please the population. This happens on the planet, not just in India.
So, let’s do a more detailed analysis. The sugar price in NY actually increased 279 points from the low seen on August 29 (23.08) up to the high this Friday, 25.87 cents per pound. However, curiously enough, the open interest in NY over this same period went up just 20,000 contracts. Ten thousand contracts in 2023/2024, which we understand to be the position of the consumers fixing prices. And, for 2024/2025 just 8,000 contracts which must have been new fixations on the part of the mills taking advantage of the good prices. Attention: these numbers are different from the abovementioned COT (Commitment of Trades), because they are based on the difference of the open position in futures published by the ICE every day.
The market went up once again following bullish narratives that aren’t strong enough to keep the market on these high levels. But why is that? For starters, the Center-South will produce at least 615 million tons of sugarcane, which will result in 38-39 million tons of sugar, a large enough number to supply possible occasional deficits. Secondly, the next crop should also be promising and the mills are totally satisfied with the prices obtained, so much so they are taking advantage of this high and fixing more volume.
As I said at the beginning, I don’t mean to be self-righteous, but seven trading sessions at a 250-point high won’t make me board the bulls’ train – at least not yet. This market might continue going up, but I cannot make this decision based on such flimsy arguments. I’m a fan of that old motto: “markets take the stairs up and take the elevator down”.
Last but not least, the basis (premium/physical discount in relation to the futures market) is trading at minus 35 FOB. Well, the bullish market pushed by the physical lack or possible physical lack of the product trades at premium, not with discount, says Commodities 101. Of course, the lack of room to stock sugar at the port has caused greater discount on the basis. More than 80 ships are waiting to load sugar at the Brazilian ports.
As it always happens in situations like this, where everybody starts getting bullish, the mills pull up the landing gear, that is, they discontinue pricing and start dreaming of higher prices that might never come. Just like me, you, dear reader, don’t know where the market is headed. But what you know is that R$ 2,760 per ton as average for the 2024/2025 crop is a profitable price that has occurred – according to the survey by Archer Consulting – in just 8% of all the events since 2000.
Our view for the 2025/2026 crop shows parsimony when pricing. There’s still a long way to go and the price trajectory can be affected. But, since prices are appealing, it’s recommended that a possible sale fixation be accompanied by the purchase of an out-of-the-money call option turning the strategy into a synthetic put, that is, a profitable minimum price is obtained with the participation in a possible market high.
Stay tuned and if you’re boarding the bull’s train, be aware that you’re following the funds and not the fundamentals. It’s the old dark ride story that looks happy and fun, but can cause fear half way through it.
NY will be closed Monday due to the Labor Day holiday.
You all have a nice weekend.
Arnaldo Luiz Corrêa
