British voters’ historic decision in favor of Great Britain’s leaving the European Union was an event that not only knocked down the stock market but also swept commodities away. Without exception, all of them closed in the red, but sugar behaved in an exemplary manner to some extent. It closed Friday at 19.16 cents per pound (October/2016), a 74-point drop against the previous week, but practically unchanged in the day and bouncing back heroically after having plummeted to 18.53 cents per pound during this Friday’s tumultuous session.
Oil and cocoa dropped 5% and were the commodities that suffered the most in the day. Coffee devalued strongly as well, with a little more than 4%.
Great Britain’s leaving the EU is a sad episode which weakens Europe, sets the intolerance spreading all over the continent and exposes the evil populism which not only impoverishes the country but makes more room for radical nationalist groups from Germany and France to act. In this case, the right-wing populism represented by the odd figure of Nigel Farage, also contaminates civilized countries. All we need now is for Trump to win the elections in the United States and Dilma’s impeachment not to get passed to make matters even worse. Then all there is left for us to do is change to another galaxy.
The 169-point market drop for October/2016 (between a 20.22-cent-per-pound high and an 18.53-cent-per-pound low in the week), with the probable partial liquidation of funds (from Tuesday to Friday), slowed down the rhythm of option buying used to protect the corroded cash flow due to the so-called margin, since the short positions are growing – so much so that option volatility dropped over two percentage points for October/2016 and 1.8 percentage point for March/2017. The market went up a lot and fast and the so-called margin triggered the irrational buying of options as hedging. It was time to sell options and time-value.
Although sugar fundamentals are constructive and should settle during this harvest, the macro scenario has been hugely affected by the events in Europe. Now we should see the settling of the current positions and/or the decrease in speculative appetite.
Because of the widening of July/October and October/March spreads, it is believed that the physical is still not enough to keep the current price levels. Everybody knows that great part of this high trend was led by the funds. So, we believe we will still witness some price correction before there is a high on the market again, which will be influenced by fresher numbers of sugar crushing and availability.
Our model shows prices above 22 cents per pound in the last quarter of this year, reflected on March/2017. The NY market has anticipated this environment.
The market open position has also dropped a little over 33,000 lots, showing there has been a liquidation in order to take profit. But the non-indexed funds broke another record and are now long by 337,000 lots based on last Tuesday’s closing at 17.00 cents per pound on average for October/2016, according to the estimate by Future Analysis Consultoria (www.futureanalysis.com.br), that is, “only” a US$1.6 billion profit.
An increase in the open position for the 2017/2018 harvest has been seen and that might point to a trend on the part of the companies (mills) to take advantage of the excellent values in real per ton that are up for grabs out there. I believe the market will take a time-out to get its breath back and drink water. The bull has gone up steep grounds too fast.
Put it down 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 5:00 in Sao Paulo, SP are open. For further information, contact priscilla@archerconsulting.coml.br.
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Have a nice weekend.
Arnaldo Luiz Corrêa
