The futures sugar market in NY closed the week with October/2015 at 11.96 cents per pound, a 45-point plummet against the previous week (a 10-dollar loss per ton). Months with shorter maturity got hit harder as a result of a lack of demand.
NY tried hard to rise. On Monday and Tuesday, for instance, October went up 96 points against last week’s low (11.84 cents per pound). The number of open interest in sugar, however, fell due to rising prices, suggesting that there hadn’t been new buys (which theoretically means there were buyers willing to open new positions at price level), but short covering (that is, sellers who were repurchasing their positions to profit taking only). However, surprisingly, the funds are slightly long, that is, they were short, their positions were repurchased driving up the market price levels and ended up with a net long position at 9,000 contracts (450 thousand tons equivalent of sugar).
But the thing is that the market fell during the week. The feeling now is that the funds might have “messed up” raising a red flag that the trading will open low on Monday. Let’s see.
The Thai sugar delivery against the white sugar contract in London that happened last week provides a clear picture of what the commodity’s world market is like, with producers having great difficulty in finding a destination for their goods. Although the outlook on the global balance of supply and demand points to deficit, the indisputable fact is the deficit is not enough to reduce world stocks. That is, before the buyer comes up with his shopping list, he will consume what is in his backyard first. Thus, the pressure on the markets and on the shorter spreads is just a consequence.
The sugar market is being impacted by three striking events: the first one is that the crushing volume up to now has been larger than last year’s and, as we have said here before, although this is not that relevant in itself, the market lacking good news ends up increasing the impact of any minimally bearish news; the second is that based on the numbers released by ANP and published here a few weeks ago, fuel consumption should increase less. The 5.22% yearly growth between June/2014 and May/2015 will weaken over this calendar year. Less consumption means less gas, less anhydrous, less hydrous, more sugar availability; the third, but not less important, is the worsening of the political scenario, which tends to get worse and should affect the real.
These three events make it hard for the prices to recover meaningfully. According to the model we have mentioned here, the expected average price in October (which refers to the trading month of March/2016) is 13.77 cents per pound. Since March/2016 closed Friday at 13.35, it gives us an idea of the extraordinary stagnation we will be in for.
The average gas price in Brazil from April to June was R$3.3000 a liter. Just as a comparison, the average traded price in the world over that same period was R$4.5600 a liter. It doesn’t mean we are that lagged since the given average price is global (in the United Kingdom, for example, it is R$5.7300 a liter). Anyway, the Brazilian lag compared to the equivalent oil price on the foreign market is about 6%.
The volume of the open interest in NY shows how weak the market is. The position is only 790,000 contracts. It is the lowest of the year and the lowest in a July since 2012. Less credit from trading companies and financial institutions for hedge operations of the mills diminish the fixation and consequently volume window. If we look at the open position of July and compare it to March (which should still contemplate futures hedges for delivery in May and July, volume peak in the Center-South) it is the largest fall since 2010 (7.5%).
Save the date on your calendar: the XXIV Intensive Course on Futures, Options and Derivatives – Agricultural Commodities will take place on October 20, 21 and 22 in São Paulo. More details will be provided in due time.
Have a nice weekend everybody.
Arnaldo Luiz Corrêa
