NY continued its amazing recovery during the week. Prices for sugar futures contract in the exchange closed Friday with March/2016 (now the first maturity month) quoted at 13.53 cents per pound, a sharp 112-point high over the week, nearly 25 dollars per ton. All the other months closed in positive territory with variations between 17 to 28 dollars per ton.
The best thing is that the funds changed and are long at about 26,000 lots, although this number refers to last Tuesday when the CFTC (Commodity Futures Trading Commission) published the commitment of traders. If since Tuesday the market has shifted almost 90 points, it makes sense to expect the total long volume of the funds to be at around 40,000 contracts (2 million tons of sugar equivalent). We cannot forget that in the Commodities 101 it says the funds position themselves on the buying side on inverted markets. That is what is going on with sugar right now, with March/2016 trading above May/2016. Will it withstand it?
If it weren’t for the delirious devaluation of the real against the dollar, which shows appealing values for the mills to make hedges for 2016 and 2017, we would certainly have NY pointing to 15-16 cents per pound. Note that the correlation (20 days) between the exchange rate and the sugar in NY was below 0.9200 on August 19. That is, for each 1%-high on the real, NY fell 0.92%; after that, it shifted until it got to September 17 and reached above 0.8400, that is, the dollar would go up 1% and sugar would also go up 0.84%! Currency and sugar are separate right now. Sugar fundamentals have taken the field.
What we had predicted three months ago has happened: a 1,200,000-ton delivery of sugar on the maturity of the October/2015 contract closed a cycle started by the Asian trading company with the third consecutive delivery of sugar in the NY exchange (May, July and October) by a single trading company. In early July, we said it was an ingenious and very intelligent strategy for it restricted the physical movement of the sugar from the Center-South at early off-season to a single buyer and that it would certainly make premiums appreciate. It can be argued that it is a small volume against the monthly exports, but the comparison must be made against the not compromised volume of sugar, not sold, which is not specified in the contract between the mills and the trading companies. Then, the volume might be a burden. This must be the rationale of those who receive the sugar.
The appreciation of the premiums are not a quick win because the market of commodities is not an exact science, but as a whole the operation engineering seems to have been well designed even for those who see it just as an observer interested in this world market. However, it is worth pointing out that premiums have yet to show some response. On maturity, a trading company was selling sugar for delivery in October at a 105-point discount against March/2016. On Friday, there were bids at a 120-discount. But the operation must have been successful for the spreads.
Knowing how to take advantage of spreads is part or at least should be part of the daily routine of the companies dealing in commodities. The distortions seen through the year have shown implicit carry fees at much higher levels than those of the financial cost to carry physical stock and has opened huge gaps for one to make money. For this purpose, it is necessary that the action be accompanied by a lot of cold blood and discipline.
In the comment The Name of the Game, on 7/4/2015, we said, “I believe we have already seen a lower price this year. The Archer’s study mentioned here last week points out that over the last fifteen years the second semester has shown a recovery of practiced average prices especially in the second quarter of the year. Then, our estimate is that prices will reach their yearly peak around October (when March is the first trading month) and can reach 14.20-14.50 cents per pound”. We then recently corrected that value (due to the real devaluation) and set our goals at 13.26 cents per pound in December. The market (March/2016) reached this value earlier than we had expected. Why?
The first estimate of the Archer model collected on September 15 shows that the mills are set at 17.41% of the sales for the 2016/2017 harvest. This is a high percentage since it reflects half of September only. The average price obtained by the mills is 12.48 cents per pound or the equivalent to R$988.76 per ton, both FOB. The average dollar set by the mills for the harvest up to now is 3.4539.
Antonio Louro, economist at MB Associates, has stated in podcast he believes that the real devaluation “should continue” and that Brazil will soon lose the investment grade given by another rating agency”. According to him, “the troubled political and fiscal scenarios make the prognosis about how far the currency can go difficult”. For 2016, the economist believes there is room for the real to stabilize to levels below 4.0000.
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Have a nice weekend.
Arnaldo Luiz Corrêa
