The sugar market in NY played an important role this week, suffering a strong 90-point fall for March/2016, which closed Friday’s session at 14.58 cents per pound. The months following negotiation at the exchange were also hit by heavy falls, which varied between 80 points for the shorter maturities and 48 points for the longer ones. On the whole, price dropped between 10 and 20 dollars a ton over the week.
The sharp fall in sugar quotations is worrying due to the weak traded volume, that is, the market fell sharply with little volume showing there are no new buyers at current price levels and that, as we mentioned here last week, the funds can be at the limit of their position capacity. The funds must have liquidated between 15 and 20 thousand contracts over the week, but the exchange released on Friday that based on last Tuesday’s position, the funds were long by 218,000 contracts. How will the market react on Monday when it finds out that even at 130 points below the recent highs (15.85 cents per pound on December 4), the funds are massively long?
For some time now we have been dwelling on the dichotomy that there is between the futures sugar market in NY, whose bullish trajectory has been fed by the non-index funds, and the physical market, whose discounts on cash businesses show that demand is far from being considered constructive. Only a few times have I seen such paradoxical situations as we are witnessing in sugar on the commodities market. Most people agree that the fundamentals are constructive, but they also agree that prices in real are too high. The first assertion leads us to think about buying while the second one compels us to sell. The funds are long by over 200,000 lots, but the physical market is trading at a snail’s pace. How can we analyze such conflicting points?
Note that despite this fall, based on NY’s closing in cents a pound times the exchange rate released by the Central Bank, the market closed at R$1,299 a ton against R$1,325 a ton on the previous Friday and 5% below the record price of R$1,348 a ton reached on December 1. Prices in real are still really good.
Oil has reached the lowest price over the last seven years (since the 2008 crisis which ended with the bankruptcy of Lehman Brothers) trading at 35.67 dollars a barrel. The real devalued even further against the dollar closing at at 3.8740 in the week. The breach of the 40-dollar level a barrel of oil has a corrosive effect on sugar pricing on the foreign market.
What can make the market fall even further? A) the perception by the funds that the market has exhausted its bullish trend and maybe it’s time to make a profit and liquidate the position; B) oil continues its bearish trajectory signaling that in the next harvest more sugarcane will be destined for sugar production given that ethanol loses its competitiveness agains gas; C) the political scenario gets even worse speeding up the real devaluation, pressuring the sugar quotations in NY which start to correlate with the Brazilian currency again because of the weakness of the sugar fundamentals.
What can make the market keep going up? A) the increase in CIDE (tax on fuel), which is in the budget but to which president Dilma is opposed; B) president Dilma’s impeachment should make the real stronger with a favorable impact on sugar quotations. Unfortunately, if the process goes through, president Dilma isn’t expected to be ousted before the end of the first quarter of 2016.
There is nothing to argue about the importance and probability of the above arguments favorable to a market recovery or fall. It’s easy to see where pendulum is swinging. That’s why, once again, it’s important not to miss the opportunity to fix good prices in real, since it is still way over the average of the last five years in nominal values. The same goes for the 2017/2018 harvest, which shows average prices over 1,500.
The average price of the daily closings of the March/2016 contract in NY this month is 15.15 cents a pound, 1.75% better than 14.98 cents a pound last month.
Thanks, Dilma. After 12 years, Brazilian inflation rate has reached two digits – another feat by the worst president in the republican history. By the way, last week I forgot to mention the statement made by the honorable president about the sugar-alcohol sector. Defending the comeback of the CPMF to next year’s budget, the president didn’t even want to discuss with her tamed advisors the comeback of the CIDE; according to her, the sector has nothing to complain about.
Take note on your 2016 calendar. The Night Course on Options will take place on February 22, 23, 24 and 25 and the XXV Intensive Course on Futures, Options and Derivatives on Agricultural Commodities will be held on March 29, 30 and 31 in Sao Paulo.
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Everybody have a nice weekend.
Arnaldo Luiz Corrêa
