The futures sugar market in NY closed the week at 20.18 cents per pound, a 37-point fall (a little over 8 dollars per ton) for October/2016 against the previous week. March/2017 closed at 20.82 cents per pound, a 27-point decrease over the same period. The October/March spread weakened another 10 points in the week, showing that the demand on the physical is still below expectations.
For a month now, the market has unsuccessfully been trying to profit taking and seek the 19.50-cent-per-pound region. We have been experiencing times filled with huge price fluctuations. Over the last four months, for instance, we have seen daily fluctuations (the daily price range compared to market closing the day before) go over 4.3% sixteen times. This happened 5 times just last month. The daily average fluctuation in August was 61 points. Over these four months, the daily fluctuation has been wider than 61 points in 38 sessions – 10 sessions just over the last month.
Every time the market approaches 19.50 cents per pound, there is an avalanche of purchases. I wonder if it is just a coincidence that the open interest of the 19.00 puts is the largest with more than 10,000 lots.
We have enough reasons to believe that, as we have said here repeatedly, the only thing that can change the sugar market trajectory to higher levels (23-24 cents per pound) is the oil price. The non-index funds keep carrying their huge 327 thousand-lot long position and it does not look like they will give up on this position so soon, mainly when they see there is an about 19-19.50 cent per pound support thanks to the trading companies.
The dollar upward curve via NDF (non-deliverable forward) encourages some companies to sharpen their pencils and move up their fixations in real per ton of the contract of sugar export to the 2018/2019 harvest. That’s right. Some companies want to take advantage of the excellent prices in real for May/2018.
With the possibility of a stable real on that futures maturity, according to the estimate of some highly respected economists, the obtained value today in real per ton making the fixation via this financial tool would only be matched if the sugar market in NY traded at 24.36 cents per pound, almost 600 points over what May/2018 traded at on Friday. Following the same reasoning, the average prices in cents per pound for the 2017/2018 (May, July, October and March) and 2018/2019 crop years would have – in thesis – room to go up 400 and 600 points, respectively, against the current average levels.
Supporting this thesis, Archer Consulting price estimate model shows that the futures sugar contract in New York might reach 23.44 cents per pound by the end of this year. Last month, the model showed that in August the average price in NY would be at 20.07 cents per pound – it was 20.01. It seems that the good price tendency ahead is being confirmed. In the year accumulated, the difference between the estimated and realized average price is just 1.60%.
The sector’s debt, according to Archer Consulting collected data in late August, is R$84.85 billion, 34.7% of which is in American dollars.
The nightmare is over. Brazil has gotten rid of Dilma and PT, which should lose by a landslide in the next city elections this year. However, we are way too far from stability. It would be really great if the government looked closely at the energy market we find ourselves in. A few measures to bring back the assurance the investor needs to put money into the expansion of the sector, which would be able to consume another 225 million tons of sugarcane over the next five years, would suffice. Fuel pricing transparency and someone such as Adriano Peres, Brazilian Center for Infrastructure (CBIE) partner-director, in charge of making such vital changes would make all the difference.
If you still do not have the book “Agricultural Derivatives”, written journalist Carlos Raíces and me, you can download it free by clicking on https://archerconsulting.com.br/livro/
The 26th Intensive Course on Futures, Options and Agricultural Derivatives is just three weeks out. It will be held on September 27, 28 and 29, 2016 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
