The sugar market nowadays shows a paradoxical situation that makes it difficult to understand the price trajectory on the futures markets. We have seen a record of the sugarcane crushing, with estimates for this crop pointing to a total production volume of up to 635 million tons, according to what was shown by specialists during the Canaplan event held in Ribeirão Preto last Thursday.
In addition, there are strong indications that the sugar production in the Center-South can go beyond 41 million tons, which are already overburdening the ports with the shipment of the product. Just for you to have an idea, the line-up in Santos comes to 5.9 million tons, according to Williams, with a possible 32-day delay.
Meanwhile, despite the uncertainties caused by the geopolitical crisis in the Middle East, Petrobras has chosen to reduce gas prices at its refineries. However, even in the face of this series of news that can negatively influence the sugar market, New York is resilient, with prices close to 27 cents per pound. March/2024 was trading at 27.67 cents per pound on Wednesday, closing out the session at 26.85 cents per pound, representing a drop of 18 points – about 4 dollars per ton- against the previous week.
The daily volume of contracts traded at the exchange has been weak, about 40% below the average making the life of algorithm traders, who make the market fluctuate to their heart’s content, easy. These algotraders use algorithms to make decisions about automated trading based on several criteria, such as technical analysis, fundamentalist analysis, market indicators and historical price data. Overall, they zero out their positions during the day, and so as they do not keep a position, they are not subject to the daily adjustments. They make a big fuss but they do not carry positions. Along with them, there are the spec funds. They, for example, once again added 11,600 lots purchased during the week (from Tuesday to Tuesday). According to the COT (Commitment of Traders), the report of the principals published by the CFTC (Commodity Futures Trading Commission), the American regulatory agency of the commodities market, they are now long by 187,185 lots.
Incidentally, on Wednesday, India’s government indefinitely extended the banning of sugar exports. This seems to be some optimistic news, right? However, as usual when India releases information that can push prices up, the market responds the opposite way. As the saying goes, if the market goes up on drops with the fact, it’s possible to infer that New York has already totally incorporated the idea that there won’t be Indian sugar available this crop. We are still waiting on confirmations.
It’s been getting more and more challenging for those who operate on the physical market, be it with sugar or ethanol, to explain the substantial difference between the values of these two products. It can be seen that ethanol is being traded for almost half of the sugar price, which creates a meaningful disparity.
We can accept the fact that, despite the fundamental factors mentioned before, the market is still optimistic. However, even if with this widely accepted optimistic perspective, the first expectation of the traders would be the strengthening of the basis. Surprisingly enough, this expectation has not become a reality. This discrepancy is so significant, that, contradicting what would be expected on an optimistic market, it would not be unexpected for the discount on the sugar basis to go up. This would happen because the sugar producers can find it more advantageous to offer a larger discount on sugar than sell ethanol at current prices. It is contradictory, but plausible.
The sugar market can be an adapted version of the famous paradox of the “Schrödinger cat”. In the mental experiment proposed by Schrödinger, an Austrian physicist who received the Physics Nobel prize for this 90 years ago, a cat is placed in a box with a vial of poison. This vial can be broken by a mechanism triggered by a subatomic particle. Until someone opens the box and observes the cat, he is in a paradoxical state, simultaneously alive and dead, based on what the complex laws of quantic mechanics say.
Like on the sugar market, where prices stay high despite the news and factors that point to a downward trend, the paradox of the Schrödinger cat shows a situation where something apparently contradictory occurs. That way, on the market even when the circumstances point to a drop in prices, the participants can make decisions that will keep the prices high, creating an apparently paradoxical upward state. This analogy points out how the financial markets and quantum physics can involve complex and apparently contradictory situations that challenge the conventional understanding.
The big question is what will happen to the market/cat when we open the box?
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Monday marks the beginning of the sugar week, and I am truly looking forward to meeting with so many friends again. It has already been four years since the last Sugar Dinner in Brazil due to the pandemic and it will be a pleasure to be present again. I have the honor of having been kindly invited to participate in the Santos Neto Seminar, the Datagro Conference, the Copersucar/Alvean meeting, the traditional Sucden lunch and the Gala Dinner, which today is presided over by Carlos Franco. I was the first president of the Sugar Club at the inaugural dinner in 2001, one month after the terrorist attack on the USA, which left us apprehensive. Time flies, my dear friends…
Enjoy the Week and those coming to São Paulo, have a nice trip.
Arnaldo Luiz Corrêa
