The funds didn’t liquidate their huge long positions on the futures sugar market in NY at the expected volume and, somehow, the market held its own – it got pretty close to the 100-day average (according to our calculation it is 20.71 cents per pound) and didn’t plummet. The week’s fluctuation, however, was negative, with March/2017 closing at 21.73 cents per pound – a 43-point fall against the previous week’s closing. The four next trading months fluctuated just about linearly with March, that is, with falls between 38 and 43 points.
On the positive side, fundamentally speaking, the Chinese demand for sugar improved a lot, opening up import perspectives on the part of that country. Conversations about a smaller sugarcane harvest in the Center-South next year point to numbers below 590 million tons. I don’t believe the market has taken this information into account up to now.
On the negative side, the closing of the first trading month of futures sugar contract in NY, converted into real per ton, pointed to an over R$100-fall per ton by late October against that of late last month. Oil has also plummeted on the international market as a result of Saudi Arabia’s threatening to increase production.
The upcoming week might be full of surprises depending on how the American presidential elections turn out. There is no telling what will happen after what we saw with Brexit. What impact a Republican candidate getting elected might have on the market is one the biggest questions mark right now. Some think Trump’s being elected is bad for the dollar and benefits commodities; others think the impact is neutral.
The funds settled about 45,000-50,000 lots and the market, as we have said above, reacted well. It is important to say that this decrease can be seen as constructive for the market for it has been absorbed by the commercials.
As we do at the beginning of every month, we turned to our price model to check the forecast of the average level of prices in NY for November (average price is the arithmetic average of the closings price of the first maturity month). Last month, our model showed October’s average price would be at 22.89 cents per pound (sent only to Archer’s client). Well, the effective recorded average for October ended up being 22.92 – a 0.13% error only. For November, the model estimates an average price of 22.72 cents per pound. Our clients have also been sent the forecasts up until February/2017. Remember that over the last sixteen years, the highest harvest price invariably occurred in January and February. Don’t forget that models DO FAIL.
Some things can make the sugar market keep growing in US cents per pound, although we believe the highest level we will see (stress plus panic) is 25 cents per pound between January and February under the current conditions, that is, within the expectation framework there is about the real, sugarcane harvest, oil, etc.
Significant changes in these factors can shift this level. On the other hand, we find it hard to see any improvement on ceiling prices as we saw on the real per ton: first, because of the expectation of interest rate reduction in Brazil; second, because of the certainty that the American interest rate will go up soon; third, because of the combinations these two factor bring into the trading of futures dollar via NDF (non-deliverable forward); fourth, with the possibility of Congress passing measures in order to reduce expenses and with the economy improvement in 2017, it is reasonable to think about the increase in dollar influx pressuring the real.
The ceiling price we saw sugar trading at spot a month ago was R$1,762 per FOB ton. Should the dollar devalue up to 3.1000 early 2017, March/2017 will have to trade at exactly 300 points above this Friday’s closing level to settle the same ceiling value seen in real. On the other hand, if the market stays at the current level, the real will need to devalue by 8.5% so that the value in real can repeat last month’s feat.
That’s why we have relentlessly insisted that the mills whose debt in dollar is small take advantage of the high prices in real per ton, not only for the 2017/2018 harvest but also for the 2018/2019 harvest – the latter eventually together with the purchase of an out-of-the-money call at the approximate exercise price to the NDF conversion obtained from the dollar effectually estimated by the market ahead.
The world lacks leaders. It is unbelievable that the United States has come to having to choose between the bad and the least worst.
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Enjoy your weekend.
Arnaldo Luiz Corrêa
