The sugar market in NY closed the week at an amazing 130-point high for October/2016, quoted at 20.25 cents per pound at Friday’s session. The fundamentals had little influence on that since there was no news these days, but there couldn’t be more explanations here and there to see if any of them can fit into a movement which is eminently technical. The non-index funds still have a really large position, a little over 300,000 contracts. Because this position is last Tuesday’s and the market has gone up heavily since then, it would be no wonder if we saw their position go beyond this volume.
No one doubts that the world sugar deficit should persist over the next two harvests pointing, in thesis, to a consolidation of the prices of the commodity on the international market. Along this line, the fact that the prices traded in NY show a speedy downward curve from May/2017 up until the last open trading month, which is May, 2019, with an in-built discount of almost 14% between the two mentioned periods should cause some surprise. The price curve doesn’t fit into the consensus view, on the part of the market, that there will be less sugar production further ahead. So, what’s wrong with this picture?
Essentially, for most Brazilian mills, which think in real per ton, the traded values in NY must be converted by the spot dollar rate plus the difference between the interest rates – Brazilian and American – considered over the period under review. Therefore, the real is on a speedy upward curve, in contrast with the the sugar price curve in NY. The mills which think in dollars, due to their debts in the American currency, hope the political and economical scenario in Brazil will improve, which should strengthen the real and, consequently, reflect better sugar prices on the foreign market, making it possible to pay off their debts with a smaller amount of product.
If we assume that the Brazilian currency will strengthen as the market trust is restored, sugar prices in NY should have a similar and simultaneous response. If we have an inverted sugar graph today, showing higher prices in cents per pound on shorter maturities and lower prices on longer maturities, by turning these values into real, the curve takes on a different shape, showing lower values, in real per ton, on shorter maturities and higher values on longer maturities, just being interrupted in months whose harvest pressure of the Center-South is felt. So, which graph would be more consonant with the current fundamentalist sugar scenario? The answer is, evidently, that the graph in real per ton best reflects this scenario.
When we take the reverse path, that is, convert the graph in real by the exchange rate estimated by the consulting companies (we have takent the data from MB Associates as reference and adjusted them to the maturity months), we estimate that March/2017 should go over 22 cents per pound, the 2017/2018 harvest should be between 21-22.50 cents per pound and the 2018/2019 harvest should be about a cent better. I believe the funds have 24 cents per pound as a goal. We just must not forget the following thing: the commodity market is not an exact science.
Over the past three months, sugar has already valued by 25% (the second best performance of the agricultural commodities, only losing out to orange juice, which has gone up 30% over the period) against a 10% fall in oil. If you were a fund manager, wouldn’t you consider changing positions at this moment?
We are making the book “Agricultural Derivatives” , written by me and journalist Carlos Raíces, available to all readers. After two sold-out editions, published by Globo, in 2005 and then in 2008, the book was discontinued by the publisher and now we have decided to make it available to all reader for free. Unfortunately, we only have the Portuguese version. Download it in PDF by clicking on the following link: https://archerconsulting.com.br/livros/livros-derivativos-agricolas.pdf. We hope the book can help you understand this market better.
Sign up before it’s too late. And the next one will be only in 2017. There are still spots 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 Sao Paulo, SP. For further information, contact priscilla@archerconsulting.com.br.
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Have a nice weekend.
Arnaldo Luiz Corrêa
