The long-expected correction on the sugar futures market has finally happened, though partially. In the week that ended on Friday, we saw October/2016 trading at 18.71 cents per pound. In last month’s last comment, we said the market needed a 300-400 point correction to survive, for it was too heavy, influenced by the huge position of the funds and with a price trajectory not consistent with the apathy on the export physical market.
The market closed at 20.78 cents per pound that week. Well, here we are. After reaching 21.22 cents per pound in late June, October devalued by 250 points, a little below the 300-400 points, but close to the 18.50-cent-per-pound level we had said was the “object of desire” level of those who wished to cover their positions and, to do so, were selling puts frenetically.
The two factor that greatly influenced the fall in sugar are the devalution of oil, which only this week fell more than 7% and was highlighted in last week’s comment as a possible factor of destabilization of the sugar price, and the favorable dry climate, which allowed for the good performance of the Center-South harvest, which crushed, up until the first fiffteen days of July, 261.4 million tons of sugarcane (16.7% above that of the last harvest), producing 13.8 million tons of sugar (30% over) and 10.75 billion liters of ethanol (10% more than last year’s). Even the ATR is 125.40 per ton of crushed sugarcane better. The sugar mix is at 47.68%, well over the 39.68% last year.
Is correction over? That was the going question among the traders. Friday’s closing, with October closing the week at 19.05 cents per pound, a 50-point fall against the previous week, but a 25-point high against Thursday provided a clear impression that more people decided to position themselves at the current levels buying the market for fear of, once again, missing the opportunity. What supports that is the feeling that , although the performance of the harvest is very good, the final number of crushing won’t go beyond 615-620 million tons, which is the average the market is expecting.
It looks like the market has found its lowest level for the short term. And the traded volume of puts was so impressive over this period that the implicit volatility of the options plummeted almost 4 percentage points in just 4 weeks. reinforcing the thesis that a lot of puts were sold to replicate a purchase of futures at a lower final price discounting the premium. These puts would only turn into futures if at the maturity of the options (which happens in September) the market were below the exercise price. Since the market responded this Friday, the explanations might be there: the futures was bought because the sale of the put became innocous with the market going above the exercise price. It is a plausible hypothesis.
And with all this happening on the sugar futures market, the non-indexed funds are still at long position of 323,000 contracts, or the equivalent to 16.4 million tons of sugar. Because the report of principal is Tuesday’s , it is fair to think that the funds have done something over the week, but nothing substantial.
Two strong arguments against the introduction of the CIDE, with due thanks to Cristina Barros, of MB Associates: the first one is the inflationary impact – higher inflation means a larger adjustment of the mininum salary for 2017 (a R$3 billion impact); the second one is that each percentage point in the inflation impacts almost R$9.6 billion of interest (via SELIC). “All taxes are recessionary because they take income off of the economy; but the inflationary taxes such as CIDE are twice as much recessionary, for they pressure SELIC instead of loosening it up.”
In the accumulated values of the month, oil melted 15%; soybean and bran fell close to 14%; gas 12.5%, ethanol (in Chicago) 11.5% and corn 9%. It all leads us to believe the energy market (read sugar ethanol and corn and biodiesel) can push sugar a little further down. The question everybody is asking is what has to happen for the funds to liquidate their positions and pocket all this money they are making now.
Index dollar measures the value of the North American currency against a basket of currencies, usually the main trading partners of the United States. The index keeps falling and encourages some commodities to go in the reverse direction. This can be the counterpoint to the previous paragraph and support the funds to hold on to the current position.
Sign up before it is too late. And the next one will be only in 2017. There are still free spots for the 26th Intensive Course on Futures, Options and Agricultural Derivatives to be held on September 27, 28 and 29 from 9:00 am to 5:00 pm in São Paulo, SP. For further information, contact priscilla@archerconsulting.com.br.
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Have a nice weekend.
Arnaldo Luiz Corrêa
