The sugar futures market in NY has seen another week of high prices. Over three months we have seen the average price for sugar (based on the close of the first trading month) go from 13.31 cents per pound in February (a 14.61 high and a 12.45 low) to 15.43 cents per pound in March (16.75-14.12), a response the market – and mainly the trading companies – thought had momentarily found a price threshold. April ended up proving this feeling right and the average dropped to 15 cents per pound after having eerily touched 14 cents per pound all through that month and experienced a 16.23 high. In May, another sling-shot brought the average to 16.68 cents per pound (17.70-15.55).
Given the spread behavior over the last week, we are watching the consolidation of the bullish feeling. We have said here many times that the market high would need to be validated by the combination of a strengthening of premiums and spreads. Well, this is happening now. July/October and October/March spreads closed at -3 and 0, respectively, compared to -33 and -50 a month ago. That is, July/2016, which was trading at a 83-point discount a month ago, at Friday’s close was practically at March’s level, with an appreciation of almost 18 dollars per ton. The premiums, in turn, are appreciating more modestly. June/July delivery at a 2 discount has been worth it. The movement of the spread shows that concern that there might not be the amount of sugar the market expected now, be it due to the delay in the shipments through the Center-South ports, be it due to the huge amount of rain expected for the next weeks with a negative impact on crushing, be it due to the rearrangement of the traders book, be it due to the speculative purchase of spreads anticipating all this movement. The bears are biting whatever has been left of their nails.
Friday closed with July/2016 trading at 18.75 cents per pound (the highest price since late October, 2013), a 123-point increase in the week, that is, 27 dollars per ton. All the spreads along the curve show a negative carry cost, that is, it makes no sense for those who have sugar not to get rid of it right away. But what sugar? With mills still having 15% residually to be fixed against March/2017, those who need sugar or are caught short run the risk of spitting blood. I don’t know why the movie “The Texas Chain Saw Massacre” has come to mind.
The price curve for next year, putting together the NY close and the NDF (Non-deliverable forward) already shows an average of 1,600 reais per ton.
We can’t forget the market is in this situation also because the mill are well fixed (see below). The roll-over of the funds to October/2016 is being neutralized by the purchase of spreads on the part of the trading companies. And if the funds want to continue adding more longs to their stratospheric position – close to 300,000 lots – they won’t find anyone who will sell to them (trading companies and mills have reached their limit) and the market will have new convulsions. Being naked short under this scenario is like asking to be beat up.
Some mills and even some analysts already find it difficult for the early planned volume of sugarcane crushing to be reached this year. I have heard serious people say that maybe we won’t reach 600 million tons in the Center-South. It still premature to place bets on this hypothesis, but this goes to show how sensitive and suceptible the sugar market is regardless of any news that – even remotely – can decrease sugar availability.
Be aware, though. The market has been in need of adjustments for a long time. Nothing goes up indefinitely like this. There will come a time when the rain will stop, the ATR will improve, the port will be less jammed, the sun will shine again and the funds will make profits (US$1.4 billion). That’s why, since caution and chicken soup won’t hurt anyone, it is advisable to use options to lock a minimum profit in exchange for a maximum return. What is not acceptable – when something must be done now – is not to do anything.
According to the Archer’s model up until April 29, 2016 the mills had been fixed by 82.8% of the sales for 2016/2017 at an average price of 14.11 cents per pound equivalent to R$1,219 per FOB ton with polarization premium. The average value of the dollar obtained by the mills was R$3.7613. The values and volumes below have been adjusted by the new criterion which isolates the present harvest from the others, correcting the distortion seen.
Put it donw on your calendar. Registrations for the 26th Intensive Course on Futures, Options and Agricultural Derivatives to be held on September 27, 28 and 29, 2016 from 9:00 AM to 7:00 PM in São Paulo, SP are open. For further information contact priscilla@archerconsulting.com.br.
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Have a nice weekend.
Arnaldo Luiz Corrêa
