The sugar market in NY closed the week at an extremely convincing high for March/2016, closing Friday’s session at 14.34 cents per pound, the highest price seen since last February. There have been an 81-point appreciation for March this week (almost 18 dollars per ton) and positive variations around 15 dollars per ton for 2016 and half of that for 2017.
The funds continue buying the market, and the traded volumes have broken records (see below). The total long position is estimated at 105,000 lots. It is important to take into account that most of this high is due to the funds and short covering, although the fundamentals set the background. In other words, export pricing around R$1,250 per ton cannot and should not be dismissed for the very simple reason that they are income-generating if we consider that the average cost of production in the Center-South (without depreciation or financial cost) is R$40.0695 per bag ex-mills. Another thing is that only 29% of the sugarcane produced is allocated to export sugar, so if the mill does a good job of risk-managing sugar, it will have a larger slack for ethanol and sugar on the domestic market. If the market continues growing, this will certainly reflect on the other products as a matter of arbitrage. Protect yourself.
The NY market can still go up because the mills are relatively well fixed for the start of the harvest (see below). The funds see the fact that in the yearly accumulated value, sugar still suffers a 7.4% fall in a particurlaly troubled year for agricultural commodities since the only commodity that shows positive variation in 2015 is cocoa with just a 4.4% gain in the year. Coffee, for example, has lost 25% so far. The most focused funds are looking for opportunities linked to the fundamentals, while others are only looking at the graphics. For them, sugar still has good potential to go up mainly because a year ago it was trading at 16.92 cents per pound and the fundamental scenario is more positive today. It is as simple as that.
Exactly a month ago, when NY was trading at 11.30 cents per pound, we emailed our clients the price forecasting based on our model, which showed the sugar market being on an upward curve, with the possibility of reaching the average of 13.26 cents per pound in December. At that point, NY was trading the equivalent to R$1,004 per ton and 13.26 would correspond to (considering it to be an NDF operation) R$1,200 per ton. The market went over that value and faster than we had anticipated, but Friday’s closing hit R$1,250 per ton. Don’t fall in love with your position. In a worst-case scenario, a combination of buying a put option with a lock-in exchange rate sets a minimum fixing value in real for the mills – so, risk managers of the sugar world, unite!!
While some cry, others laugh. An executive from the sector was commenting at a recent dinner that some mills were complaining about the hedging structure they had set up and would double the volume of fixation if the futures sugar market reached a certain level. Well, the market has reached such levels, and now they (the mills) are scratching their heads. They have been taken in by “the snake charmers”, according to the same executive.
These mills forgot about the old and good concept that there is no such a thing like free lunch when they set up structures with this configuration. No problem if they met those needs when they closed the operations. No problem if they allocated a percentage to them. The problem is that when they are seduced by an apparent feeling of comfort this “outsourcing” creates , they sell their total sales volume. The snake isn’t charmed by the sound of the charmer’s flute, but the rat urine smell he makes come out of the basket in order to look for its prey. Nothing is for free; there is a cost to everything. Even something that seems to be free is already included in the package. Just three months ago, for example, the value in real per ton (taking the NY closing x the exchange rate) was trading at R$830 vis-à-vis this Friday’s closing at R1,250.
The Archer Consulting model has found that the pricing volume for the mills until September 30 reached the equivalent to 5,758,000 tons of sugar , or 22.92% of the estimated total of Brazilian exports for 2016/2017 at an average price of 12.39 cents per pound, equivalent to R$1,020 per FOB ton. The average dollar fixed by the mills for the period is 3.5864. This has been the largest percentage of accumulated fixation for sugar in NY for the period on the part of the mills since we started using the model. It is worth noting that the volume of the futures sugar contract traded in September was a record, coming to 4,328,729 lots traded only in the futures and beating the volume of 4,157,275 contracts traded in February last year.
The registrations for the XXIV Intensive Course on Futures, Options and Derivatives – Agricultural Commodities to be held in São Paulo, SP on October 20, 21 and 22 are coming to an end. To register or get further information, contact priscilla@archerconsulting.com.br.
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You all have a great weekend.
Arnaldo Luiz Corrêa
