The sugar futures market in NY appreciated 300 points in just 9 trading sessions – from the 24.10-cent-per-pound low two Fridays ago to the 27.10-cent-per-pound high this last Friday. The strength of the funds was felt in its full extent.
In the week made shorter by the Labor Day holiday in the USA (on Monday) and the Independence Day holiday in Brazil (on Thursday), the sugar market was predominantly led by the appetite of the non-index funds. They added, as reported by the COT another 33,000 lots, totaling a position of 187,700 long!
In the recent past, I don’t recall seeing the funds – after settling a good part of their long position – returning with such an aggressive appetite and moving the market close to levels that it reached in April: 27.41 cents per pound; an extraordinary buying strength that defies – at least momentarily – any more balanced analysis about market fundamentals.
Though Friday’s closing points to an accumulated appreciation of the market over the week, the first trading month, October/2023, closed out at 26.40 cents per pound, 59 points above the previous week’s closing (13 dollars per ton). It’s important to point out the amazing volatility seen all through the week.
On Tuesday, the price range (determined between the low and the high of the day) was 128 points. Over the week, the average was 100 points. If the price fluctuation were directional, we would undoubtedly be on an extremely bullish or bearish market. However, the laterality of the prices is what stands out, showing an erratic process subject to algorithms and trading systems. As a market executive put it, “The little robots are on the loose”. Looking at it from this angle, the market has had an average fluctuation of 103 points at the four trading sessions of the week; the asset fluctuated 144 points between the low and the high, closing out the week appreciated by 59 points.
Take a look at the whirlwind of news that had an impact on the market over the last nine trading sessions and decide whether there was enough news to move the market 300 points in nine days. What is actually evident is that the funds are placed at 200,000 contracts, and this will greatly impact the market. The increase of the open interest suggests that the mills have raised the fixing percentage for the 2024/2025 crop (Archer Consulting should publish a new estimate next week), which must be around 30-35%.
Prices moving at this speed bring on a known problem: margin calls and increases in volatility of options, fed by the purchase of out-of-the-money calls used to ease part of the stress of the calls.
The mills get more concerned about fixing prices and see the market move against them, with an ongoing risk of having to use the cash flow to meet the possible margin calls. The spread charged by the institutions that offer fixations in real per ton tend to increase due to the risk that the market might continue going up. It’s not an easy decision. The fixation in real per ton along with the purchase of a call 200 points above the market can be a less costly choice.
Even if the news coming out of India and Thailand comes true, it’s legitimate to look at what is going on with the Center-South crop, which shows records of sugarcane and productivity, according to reports from several mills. Over the interval of the nine mentioned trading sessions, sugar in NY converted into Brazilian currency jumped from R$2,786 to R$3,026 per ton, that is, R$240 per ton.
The closing value over the week for the 2024/2025 crop was R$2,856 per ton. The mills will probably continue benefiting from these appealing prices.
A crucial question we all must ask is about the financial capacity of the funds. How much more can they add in purchases on to their current position? What is the limit? Over two weeks, the funds went from 105,307 to 187,694 lots. The market went up 325 points (from August 22 to September 5). The funds needed to buy about 1,150 lots (58,000 tons of sugar) to move the market US$1 per ton.
Simply put, in order to take the market to the so desired 30 cents per pound, the funds will need to buy another 91,000 contracts, reaching almost 300,000 long contracts. Is that possible? Of course, it all depends on the financial capacity. However, the crucial question is: how vulnerable will this position be when they decide to get rid of it because of, just as an example, an opportunity coming up in another commodity or asset?
You guys have a nice weekend.
Arnaldo Luiz Corrêa
