In the week when fear and panic crossed the Atlantic Ocean – after the collapse of two American banks – and settled in Europe with the difficulties reported by the Credit Suisse, the capital flight of risk assets harshly hit the commodities. Type WTI oil dropped 13% over the week while Brent (which serves as reference to Petrobras) melted 12.5%. The soft commodities suffered less: sugar dropped a little more than 2% while coffee and cotton showed a less than 1% slight refraction.
The sugar futures market in NY closed out the week with May/2023 at 20.67 cents per pound, a 49-drop against the previous week, almost 11 dollars per ton. All of the trading months at the NY exchange, from May/2023 to October/2025, retreated between 35 and 54 points, equivalent to a drop between 8 and 12 dollars per ton. This is all still a reflection of the crises that has taken place and that now seems to be equating. With the NY drop and the dollar appreciation against the real, the export sugars shrank 15 real per ton over the week.
When we examine what happened here in Brazil with the Americanas, in the United States with Sillicon Valley and the Signature Bank, and with the Credit Suisse in Europe, all of which audited with the stamp of the major audits of the world, we start questioning the technical criterion that these analysts use to scrutinize the balance sheet of these companies and be able to say if this or that company is a triple A. I’d rather not know.
In a world where information abounds and knowledge is scarce, we will still watch a lot of these surprises hitting the markets for many, many years. For example, look at what recently happened to players of a soccer team in São Paulo, who invested a huge amount of money with a manager with the promise that the money would yield 5% per month. Why do these people firmly believe that this type of earning is serious? Luiz Stuhlberger, considered one of the greatest fund managers in Brazil, delivered a gross earning (without discounting the internal interest rates) of approximately 1.73% per month over 25 years. How can someone believe that they can earn 5% per month constantly? I’d rather not know.
Another unbelievable example is the Maddof case, who for almost two decades cheated hundreds and hundreds of people, many of whom celebrities, who entrusted their money management with this Wall Street scumbag. During this period of Maddof’s reign, a mathematician and statistician tried to alert SEC that the constancy of the earnings he used to say he got from the fake fund he managed was mathematically impossible to get. Nobody could get yearly earnings in such a constant way for so many years on a market known as being volatile. And what did SEC do? It didn’t do anything.
And how many cases of poor management and risk unawareness related to the use of derivatives on the commodity market have we seen here and abroad? For example, the German Metallgesellschaft AG, which lost US$1.3 billion because it used a long-term hedge strategy using futures with short-term maturity. And Codelco (Corporación Nacional del Cobre de Chile), which in 1994 lost US$ 218 million due to a mistake on the spreadsheet? These are shocking mistakes that challenge people who have at least a little reasonableness. In Brazil, the cases also abound in grains, coffee, sugar, currency. There is not enough room to describe the atrocities I have seen in this area.
Derivatives are something really serious and should be treated within the company with absolute priority. The problem is that the senior corporate management – and many times the Board – has no idea what derivatives represent or how much added value and/or risk mitigation they can carry.
The commodity market in Brazil and abroad, based on the experience I have had over these years both as an executive and a consultant, is still short of what is needed. The knowledge about the subject, despite the amount of available information, is still incipient. Few companies qualify their employees (traders, controllers, audits, among others) to dive into the theme. Futures brokers invariably lack knowledge and fail to boost the market. Concepts such as gamma, beta and theta and their impacts on option positions in order to replicate a hedge with futures still cause doubts and uncertainties. You will notice that few professionals master this subject matter on this or that side of the counter.
That’s why the market moves like a herd. We often become bullish in the top and bearish in the bottom. We also prefer being around those who are as lost as we are in times of crisis. We seem like fearful little piglets under a thunderstorm, all together and frightened. How many industrial consumers bought futures or even calls when sugar was trading at 10 cents per pound in May/2020? How many mills fixed sugar when the market came close to R$2,500 per ton? I’d rather not know.
Solid knowledge about derivatives changes our view transforming crisis into opportunities. Much more than a buzzword in self-help books, markets that go overboard on the downturn push us to build bullish strategies; markets that go overboard on the upturn (in my view it has been like that in the sugar case) push us to build positions that protect us from the fall. In general, however, what we see on the markets is exactly the opposite: in the downturn the weak start selling and, in the upturn, the desperate buy. And history repeats itself.
I attended a workshop where Nassim Taleb, essayist and author of the Black Swan, was the teacher, and he surprised me positively when he said that he never read news in newspapers or bank reports to make decisions. He tried to stick to the market fundamentals in question and seek weaknesses of that segment and then bet on a strategy that – if everything went wrong – was the winner with huge profitability. This type of strategy was agreed to be called Black Swan. It looks like it has been working out fine. How long will it take us to start thinking outside the box? I’d like to know that.
It’s been commented on the market grapevine that an important partnership between two large companies is hanging by a thread.
Archer Education is sponsoring the second Course on Ethanol Commercialization Intelligence on Fuel Markets (In Person) on May17 (Wednesday) and 18 (Thursday) in São Paulo, SP, given by specialist Tarcilio Rodrigues. For further information, please contact priscilla@archereducation.com.br
You all have a great weekend.
Arnaldo Luiz Corrêa
