The sugar market in NY continues its high and low trend, filled with surprises and upheavals, with moments of enthusiasm and panic. The longs want to settle when the market falls, for fear it might fall even further and increase losses; the shorts come in to cover position when new high peaks are reached. It’s a mix of the Tower of Babel with the endless odyssey of Candide by Voltaire. I don’t think this state of affairs will change soon.
All this uncertainty, which demands that the participants take a great dose of tranquilizers, is sometimes due to, according to some, the amount of crushing in the Center-South and sometimes due to the instability of the numbers popping up from Thailand and India, sometimes because the non-indexed funds are buying unreasonably (they have broken a new record of almost 250,000 contracts now). Choose the best excuse. We will talk about it later.
The forecasts by several consulting offices compiled and published by NovaCara perfectly show how different perspectives take a toll on the perceptions of the price trajectory. Eleven consulting offices show crushing forecasts which vary from 590 to 640 million tons, or a 50 million-ton difference (the average is 622, with Archer at 618.5 million tons).
The estimates for sugar production in the Center-South range from 33.2 to 35.1 million tons, that is, 1.9 million tons. On average, they bet on 34.3 million tons (Archer bets on 34.4). And the estimate for ethanol production ranges from 24.8 and 29.5 billion liters, or “only” a 4.7-billion-liter difference. On average, the consulting offices estimate it will be 27.8 billion liters (Archer foresees 27.5). If with all the scrutinized data we have about the Center-South there is no consensus on sugarcane production in a universe – according to some – of 78,000 sugarcane producers, how can someone say for sure what will happen in India, which must have 35 million producers?
The concrete fact is that the market volatility has gone up a lot and the demand for protection has too. Take a look, for example, at the volatility curve of puts and calls out the money (those options whose exercise price is above the market’s, in the case of calls, or below the market’s, in the case of puts). In theory, taking into account the market in March/2017 at 17.37 cents per pound, the put premium of 16.00 should have a value pretty close to the call of 18.75 since both are midway to the closing of the market. That’s a silly mistake! If someone wants to buy a call with money from a put sale of 16.00, they will have to settle for an exercise price way above the 18.75, that is, 22 cents per pound. To sum up this nerdy talk, the market’s bet right now is definitely high – there’s no doubt about that. Whether it will happen or not is something else.
This week, the annualized volatility of the three first NY maturities has gone up from 0.9% to 2.4%. This represents an increase in the paid premium to protect against price variation risk between US$1.00 and US$1.40 per ton for the exercise price closer to the market’s. The funds are making money.
On Monday, the sugar week in NY starts out with several breakfasts, lunches, meetings, presentations, dinners topping it all off with the Gala Dinner at the Waldorf Astoria. A lot of information will be exchanged and digested among the guests. Ethanol consumption is usually very bullish on prices on these days. The environment should have a much more agreeable atmosphere than it did last year because this time around there are more bulls than bears. It is the perfect time for us to listen to different opinions and the Datagro Conference, which will be held on Wednesday at the Waldorf Astoria, plays this role very well. We will see each other there.
The futures market in NY closed Friday at 16.74 cents per pound – a 100-point gain against the previous Friday. When we said here that March/2017 would reach 17 cents per pound, we got an e-mail from a supporter saying we had gone “crazy”. The other maturity months closed with positive variations between 90 and 18 points, or from 20 to 4 dollars per ton – the higher, the shorter the maturity is.
Archer’s model for price forecast, is based on correlations between average prices of each traded month analyzing data from the last 16 years. Many of these correlations are above 0.9700. However, the longer the price curve is, the smaller the correlation gets. For example, May’s average price has an adherence to April’s average price at 0.9700, June’s to May’s at 0.9755, July’s to June’s at 0.9891 and so on and so forth until December when the product of these multiplications come to 0.8618, that is, in theory, December’s price depends 86% on May’s price. The model says that average prices should basically stay unchanged in May and June with a slight recovery in July (a 50-point positive variation). For October (which will reflect March/2017 contract), the model shows prices at above 19 cents per pound.
After 13 years, Brazil has come out of the darkness. Good Brazilians hope we will never have such a scoundrel-ridden party take the power and which has set our economy back to the 2005 level. There isn’t much to celeberate yet, for Dilma’s ghost will keep haunting the Presidential Palace until the 180 days that her impeachment process should take are up. It has been a relief to hear a president who can speak a good Portuguese.
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A safe trip to all those flying to NY to attend the Sugar Dinner.
Nice week and good businesses to everybody.
Arnaldo Luiz Corrêa
