Surely, 2023 can be remembered positively or negatively, depending on the efficacy of the hedge strategies adopted by each participant. Rarely have we seen a year full of such favorable opportunities for the mills like this year, with sugar prices in real per ton, adjusted by the inflation rate, operating at exceptionally profitable levels, something seen in just 5% of the trading sessions over almost 25 years.
However, it is unfortunate that even under the favorable conditions fostered by the futures market, suggesting that the mills fix export sugar prices, some chose to wait on better opportunities, lining up with the optimistic narratives that seemed to overlook the fact that the market was driven mostly by the active participation of the spec funds.
On several occasions we used these weekly comments to highlight the projection of a significant sugarcane crop in the Center-South region, with direct impacts on the increase of the sugar production. India’s interventions on the market, especially as far as the restriction of sugar exports is concerned, turned out to be unable to meaningfully change the trends of the global market. The key factor for the recent market volatility was, as we pointed out in our previous analyses, the performance of the non-index funds. These funds played a key role, first pushing the prices to higher levels, and later contributing to their sharp fall.
According to the COT (Commitment of Traders), published today by the CFTC (Commodity Futures Trading Commission), the funds had liquidated 52,590 contracts by Tuesday. They must have done more than the few 50,000 lots they still had on that date. We believe the sharp fall was exacerbated by the short position of the puts below the strike price of 27 cents per pound.
Today the market players could not care less whether India will produce more or less ethanol, whether Thailand will have a larger or smaller crop, whether it will rain or be sunny, whether there will be leftover sugarcane, whether the port is congested or whether there will be global surplus or deficit. They are all looking indoors, scratching their heads and reflecting on why over and over and over again they were swayed by the narratives instead of looking at the return to the shareholders. But, if it is any consolation, there are people who are worse off: those who believe that accumulators are an excellent hedging strategy, despite their clear restrictions.
Last Friday, the closing of the market of New York for the sugar contract expiring in March/2024 reported 21.99 cents per pound. Looking back on an analysis we shared six months ago, we predicted the possibility of the price reaching 22 cents per pound before “Santa Claus climbed down the chimney, save the occurrence of adverse climate events or other significant exogenous factors”. We don’t have a crystal ball or vocation for being a fortune-teller. This prediction was not based on conjectures, but on an objective and dispassionate market analysis. We focused on the profitability supported by the market fundamentals strongly influencing the high-price trend, which also made the market susceptible to abrupt fluctuations.
So, within seven weeks, the market melted 700 points (from the 28.14 high on November 7 to the 21.16 cents per pound low last Thursday), equivalent to about R$800 per ton – a fall of almost 25% that had not occurred since the Covid-19 pandemic. In absolute values, a fall above 700 points over the same time interval occurred in September/2011 when New York traded at 24.84 cents per pound after a recent high of 31.85 in August the same year.
In the yearly accumulated, sugar is still a commodity that is in positive territory: 24% of gain, behind orange juice (119%) and cocoa (62%). WTI oil, wheat and natural gas fell 9%, 29% and 58%, respectively.
When asked where all the market bulls had gone to, the trader of a São Paulo mill answered, “They are hiding behind some sugar warehouse”.
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This is our last comment of the year. We hope our analyses have been more sweet than bitter. During this festive period, we want to wish our clients, readers and friends a Christmas as sweet as sugarcane and an even sweeter New Year.
While you enjoy your deserved vacation, we will be preparing for next year. We will be back full of energy on the first weekend of February, ready to face the “highs and lows” of the market with you. Until then, enjoy the Holidays, recharge the batteries and be careful not to go overboard. Just like on the market, moderation is always the key word.
Merry Christmas and a 2024 full of happiness, hope, health and success in all aspects of your life.
Arnaldo Luiz Corrêa
