The futures sugar market performance in NY couldn’t be more promising. May/2016, which expired this Friday at 16.16 cents per pound, accumulated a high of almost 20 dollars per ton over the week, with a 415,000-lot delivery, of which more than 80% from Brazil.
The other trading months closed at larger highs for shorter maturities and with more modest variations the farther the maturity is. Thus, we have had an average appreciation of 18 dollars per ton for the first group and 10 dollars per ton for the second one.
It’s interesting to note that the price curve is at a cost and carry in the first two trading months, that is, July/2016 and October/2016, whose carry implies about 6.50% a year, closed at 16.32 and 16.59, respectively. Markets at a carry mirror their perception that there is enough product going around.
It’s normal that on futures commodity markets whose curve is at a cost and carry the funds are short, since there’s enough product and the eventual roll-over of the short position to the next maturity implies repurchasing the first month and selling the second one which shows a premium and, therefore, a gain in the portfolio of the funds. The thing is, the funds are actually long – and by a lot. Based on last Tuesday’s session, they were at more than 230,000 lots (a new record). Just think what they are like now after the amazing market high on Friday, with July (which is now the first trading month) appreciating by more than 60 points.
The two market faces are close to having a confrontation. The short term showing the bearish side, but conflicting with the bullish position of the funds. The long term showing the bullish side due to the market fundamentals for the long term, but which isn’t felt on the physical market or spreads.
The strong manner in which prices responded to Friday’s session can be attributable to the fall in production in India, the lowest since 2009/2010, to the appetite of the funds which keep betting on the increase in sugar prices and increasing their long positions, to the real appreciation against the dollar, which can change the arbitrage of the sugar with ethanol and affect the availability of the former. In short, there is enough for every taste.
The futures’ response next Monday will dictate the pace and rhythm of the music the market will want to dance to from now on. A week with stronger prices might make importers buy earlier under that feeling we all get when we miss the boat. A strengthening of the spread might signal that the long-term fundamentals are more present. If the funds keep making new purchases, the volatility of the options will keep on going up as it happened this Friday.
We will have an extremely interesting market – one we haven’t seen in a long time. It’s time to sharpen our pencils and choose the correct risk management strategy to make the most of the opportunities. Fence, hedge with options using delta, futures, whatever the appetite there is for risk, the sector has a wide range of strategies which should help add value to the shareholder.
It is worth remembering that with the strong market expiring on Friday at 16.16 cents per pound, the value in real per ton didn’t change much – R$1,270.
Eliane Castenhede, columnist for “O Estado de São Paulo” newspaper, believes there is some fear president Dilma will feature a “grand finale” for the impeachment process and her years in the government. Something like chaining herself to the presidential table and having to be forced out of the palace. Something “theatrical and dramatic to illustrate her indignation, create strong images and support the coup narrative”. I wonder if 200 years after the Queen of Portugal (and of Brazil too), Maria I, the Crazy, from 1815 to 1816, Brazil will watch a rerun. That’s sad.
If you want to get our weekly comments on sugar straight through your e-mail, just register on our site by logging onto https://archerconsulting.com.br/cadastro/.
Have a nice week everybody.
Arnaldo Luiz Corrêa
