In 1935, the great Carlos Gardel, the most famous tango singer in history and whose nationality is still the subject of much debate today – Argentine, French or Uruguayan, wrote one of the most beautiful tangos ever played and whose lyrics is about a compulsive gambler who risks his luck on horses, an addiction compared only to his attraction to and love for women. Always taking high risks, he lost everything in a horse race where his favorite horse lost by only a head.
The sugar market deserves today – as background music – a tango by the immortal Gardel in honor of those who fall head over heels in love with risk. It serves the funds, which still carry a huge long position without pocketing the profits that have come to US$2 billion; it also serves the mills, which believe prices have only one trajectory (high) and bet on them improving even more and do nothing to protect against an eventual reverse. They risk, like the sad character in Gardel’s tango, losing everything by only a head.
The sugar futures market in NY closed the week with the first trading month, October 2016, at 19.31 cents per pound, a 26-point fall against the previous week, almost 200 points below the maximum of the contract traded only 10 days ago (21.10 cents per pound).
With crushing reaching good volumes, almost 20 million tons more over the yearly accumulated compared to the previous harvest over the same period and, therefore, more product availability, it is only natural that prices stabilize. However, this might not be a good argument. We believe that the profit the funds are looking up to right now is much larger than any fundamental analysis made to order. And profit taking might have been the leading character of the week. All this despite – once again over the last years – a fire, this time at Rumo’s sugar terminal at Santos port, having put more fire (no pun intended) on the market, making quotes go beyond 20.30 cents per pound.
We still believe the market should test the 18.00-18.50 cents per pound before recovering – in the last quarter of the year – its high trajectory, about a 300-point performance on the market high. The market has gone up a lot and really fast; it would be natural for it to correct in the same standard. Note that many structured operations have been made with puts out of the money (19 cents per pound) financed with calls that had a more expensive volatility. Between the exercise prices of 18 and 19 cents per pound for October, there are 32,000 open lots. The funds have settled very little of their positions. What kind of reaction will we see if the market trades close to 18.00-18.50? Don’t fall in love with the market.
The first price fixing estimate of the mills on the NY market for the 2017/2018 harvest shows, according to the model developed by Archer Consulting that up until the end of June/2016 between 2.0 and 2.5 million tons had already been fixed. The average price was 15.93 cents per pound. This price might look low, but we must remember that, by the end of last year, when sugar quotes in NY were around this value, the dollar was trading close to 4.0000 real and was the great driving force for the fixations to occur so soon. The average adjusted value of fixation, considering the NDFs (non-deliverable forward), point to R$1,508.99 per ton, or 65.78 real per pound, with polarization premium.
Models are faulty. We thought the percentage of fixation was at about 15-20%, but it is reasonable to think that many mills which depend on the credit limit given by the trading companies (which continue being restrictive and choosing their suppliers) still haven’t had the opportunity to fix for 2017/2018 because they are out of the limit or out of the period authorized by the trading companies. Of course there are companies fixed at 40%, others at 20% and many with almost nothing.
Brazil is a few weeks away from definitely getting rid of this ghost called Dilma Rousseff. Not even the most pessimistic people believe in the removed president’s coming back. Foreign investors have again kept their eyes out on Brazil; the stock market had a week with consecutive highs while the dollar plummeted against the real. If we effectively reach R$3.0000 and assuming the target price of fixation of the mills is around R$1,500-1,600 per FOB ton, the equivalent price in NY would have to be between 21.75 and 23.25 cents per pound. That’s a good level for the mills to sell their calls and with the premium acquire a put spread which best fits their budget. Alternatively, we can always listen to Gardel.
Put it 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 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
