The sugar futures contract maturing in March/2024, traded in New York, closed out the week with a minimum fluctuation, at 23.99 cents per pound, and stayed practically stable compared to the previous week’s close. A slight increase in the other maturities was seen, with an average increase of 24 points, which represents an increase of a little more than 5 dollars per ton.
The sugar market keeps showing a characteristic volatility, with oscillating moves that seem to signal a direction based on the economic fundamentals, though it often deviates from its forecast course. So, several uncertainties arise for the market players and for the decision makers.
As the first crop reports start being released, we see preliminary estimates that suggest a total production between 590 and 600 million tons. It’s important to consider these numbers carefully, as experience repeatedly teaches us, especially because we are still in the early stages of assessment.
To put it into context, at the start of the 2023/2024 crop of the Center-South, the early estimates of February/2023 pointed to a production of 575 million tons. This example serves as a reminder that forecasts can suffer meaningful adjustment as more data become available.
Nowadays, it’s shown that the 2024/2025 crop of the Center-South can present a reduction against the previous production, which registered an amazing volume between 645 and 650 million tons, benefited from a year of almost perfect conditions, including a meaningful increase of 8.5 million tons in sugar production in that region only. This setting of high production serves as reference to future expectations.
As for prices, our analysis is that the market would need extremely negative news for the sugar price to drop below 22 cents per pound. We should remember that when prices reached 20 cents per pound late last year, such move was influenced by unfavorable operations in derivatives thought of as toxic, which resulted in the loss of essential market structures and left risk managers, or hedgers, without the necessary price protection.
Nowadays we see market stability, without the external interferences previously mentioned. We analyzed that prices below 22 cents per pound can significantly affect the dynamics of the sugar market, especially in countries such as Thailand. In this context, Thai producers can find the transition to other cultures more profitable due to less attractive prices for sugar. Likewise, in India, a reduction in prices can foster a more ethanol-oriented production over sugar production.
About India, one of our most valuable contacts in the region predicts that the market volatility in 2024 will surpass that of 2023, which had an average annual volatility of 29.54%. In addition, it is expected that India won’t significantly take part in the sugar international trade, both in import and export, in the near future.
So, the ingredients we have for the cake are: a) the crop of the Center-South between 590-600 million tons; b) India out of the market; c) Brazil producing more sugar; d) hydrous too weak to recover; e) weak corn market (more hydrous on the way); f) shamefully anemic energy market. However, if the funds (it’s always them) decide to rebuild a long position on the futures market, they will be able to raise prices quickly, especially if we consider that the mills must have already fixed close to 70% (we are working with numbers) of the 2024/2025 crop. Don’t forget to focus on risk management.
And speaking of that, look how interesting: suspecting the market was really exaggerating over the last two months of 2023, imagine that on November 7 you had taken advantage of the sugar high in NY, when the price hit 28.14 cents per pound, and checked with your risk committee at the company about buying US$100,000 equivalent in puts at the exercise price of 24 cents per pound, maturing in March/2024.
You would certainly find some pushback from the committee, because after all with the market trading at 28 cents per pound, “it’s obvious that we are on the way to over 30 cents per pound, everyone can see it” would be one of the probable arguments against your strategy.
If you succeeded in convincing your peers on the committee, you would have bought 692 lots of that put protecting a little more than 35 thousand tons of sugar. Seven weeks later, as everybody knows, NY melted to 20.03 cents per pound. At that moment, the US$100,000 spent was worth a little more than US$3.2 million. If we converted it all into dollars per ton, we can say that for each US$1 spent on protection against the price fall, US$32 would have returned to their safes.
Arnaldo Luiz Corrêa
