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Sugar

A NEW YEAR RIDDEN WITH UNCERTAINTIES, BUMPS AND VOLATILITY
02/02/2024

The sugar futures market in New York presented a setting of great volatility in 2023, which can repeat itself in 2024. At the start of 2023, prices were at about 19-20 cents per pound and reached a peak of 28.14 cents per pound, frustrating those who were hoping prices would come to 30 cents per pound or more.  

This price hike was especially driven by the voracious appetite of the speculative funds, even in a fundamentalist setting that pointed to a sugarcane bumper crop. However, the market saw a sudden turnaround, with a drop of almost 19% in the average prices of the futures in December/2023 (first contract, maturing in March/2024), closing out at 22.22 cents per pound against the 27.31 cents per pound in November. This represented a drop of more than 500 points.

The speed at which these changes occurred is unprecedented on the sugar market in New York this century. The volatility and the influences of the speculative funds will continue to be important factors to be monitored in 2024.

The driving force responsible for the price drop is called market fundamentals. All through the crop, it was possible to notice that we were before an amazing sugarcane yield that ended up coming true and delivering almost 19% more sugarcane against the previous crop and unbelievably more than 25% of sugar production against the 2022/2023 crop (42.1 million tons of sugar against 33.5 million the previous year).

It all seemed to be going according to the speculators’ plans. However, the volume bought of out-of-the-money calls, financed by the sale of puts, brought along a drastic component bringing more power to the market drop via the correction of the delta of the short puts when the speculators started settling their positions. I wrote an article about that on LinkedIn entitled Sugar Roller-Coaster: Important Lessons on Risk Management (https://bit.ly/3up5lZS) that puts forward a deep analysis about these events and highlights important management lessons that can be applied to similar situations in the future. I have no doubts that 2023 was a year of much learning for those who are involved in management risk.

January represented a month of great recovery, influenced by the pooling of several factors: a) industrial consumers who had missed out on buying sugar due to the speedy price hike took the opportunity of the drop to strengthen their acquisitions of raw material over the price curve, providing a palpable relief; b) the rainfall in December and January was below the historical averages, intensifying the concerns over the availability of sugarcane for the crop starting in March; c) the market starts to build consensus on the expectation of a reduction in sugarcane yield for the 2024/2025 crop, estimating a drop between 5-7% (though some market players bet on much larger numbers).

So far, this has been only guesswork on our part. However, why could we see a similar roller-coaster this year? Well, if we compare Friday’s close in New York, where the futures contract maturing in March/2024 closed out at 23.93 cents per pound, with 2023 last trading floor session, we can see that at the start of this year the market has already registered an increase of 339 points in the March/2024 contract (equivalent to 75 dollars per ton). The increase average was 228 points (50 dollars per ton) for the maturities related to the 2024/2025 crop of the Center-South and 148 points (33 dollars per ton) for the 2025/2026 crop. These early fluctuations show that the market can keep being volatile in 2024.

Now, allow me to address the following issue: just as the market didn’t weather the high over the last quarter of 2023, due to the absence of a counterpart when the funds began settling their long positions, that is, there weren’t enough buyers available to meet the sales of the funds, we can now see an intriguing situation. If the funds decide to rebuild their long positions, a relevant question will come up: who would be willing to provide liquidity, taking on the role of the seller? The mills, natural hedgers, have already comprehensively fixed positions for the 2024/2025 crop, at an estimated 65% of fixations, focusing mainly on May and July.

It all leads us to believe that the market will keep trading within a restricted interval of 22-24 cents per pound over the 2024/2025 crop (May/2024 to March/2025) for a while and the extremes will be put to the test as we get further information about the Center-South crop, the weather and – we cannot forget about that – the exogenous factors with the conflicts in Asia.

A new year all right, but the uncertainties, bumps and volatility haven’t lost their pace.

 

Arnaldo Luiz Corrêa

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