A market that goes up 430 points in a little more than a month (16.75-12.50) was doomed to a price adjustment and profit taking. That’s what happened. May/2016 closed Thursday at 15.87 cents per pound, only a 10-point devaluation in a week. However, the price plummet at the last session of the week, devaluing more than 5%, with the market falling from 16.75 to 15.78, shows the market was too heavy. The other maturity months closed practically unchanged. That is, all the market rose through the week was returned to Thursday’s session with a steep 80-point devaluation.
Besides having gone up strongly and very fast, the fact is that the real devaluation in the week drew new price fixing. Wednesday’s closing was showing more than R$ 1,400 per ton (if we take NY traded at 16.71 cents per pound and the real at 3.6765), that is, a record price. I believe many traders realized that prices were ridiculously advantageous and driven by a weaker real started fixing the next day. Even so, Thursday’s closing showed R$ 1,340 per ton, which makes me believe that NY might continue to fall (depending on the performance of the real) another 3-4%.
The signs we needed to consolidate the robust high on the sugar market in NY didn’t confirm because the physical market is still slow and the weakening of the spreads shows that the market participants no longer believe in a shortage of sugar availability for May.
On the other hand, the fall in hydrous sales can put even further pressure at the start of the harvest and change the equation since sugar in NY is still advantageous for the hydrous mills by about 20-30 points.
The sugar market in NY has been strongly fed by the speculative position of the funds which carry a long position of more than 200,000 contracts. The market melting on Thursday shows the funds have liquidated part of their long not yet reflected by the number published by CFTC. The market stretched and seems to have found a temporary level of safety.
Though the market fundamentals are still positive due to the constant corrections of sharper deficit, the exchange component is making a difference again. Over the last six months, the closing average of NY has been equivalent to R$1,275 per ton using the exchange rate of the Central Bank. This number must be used for us to try and set where NY prices should orbit. Over the last 3 months, this value has gone to R$1,288. That is, with the real at 3.600, a reasonable floor for the sugar would be 15.42 cents per pound; with the real at 3.800, the floor goes to 14.61 cents per pound.
Delay in crushing due to the rains is something that can change this scenario. However, the cooling of the economy can change the mills’ approach as to the production mix, placing more sugar into the system and so pressuring the current price levels. For now, this is just assumptions.
I believe the market still hasn’t realized that the Center-South can have its third year in a row of lower ATR production despite a greater amount of sugarcane to be crushed. Although 2020/2021 is still too far, I have no doubts that we are beginning to build a extremely positive market for the next years given the limits Brazil has to expand investments vis-à-vis a world consuming market which grows between 1.9% and 2.2% a year while production staggers by 1.6% of growth a year.
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Happy Easter!
Arnaldo Luiz Corrêa
