The sugar market started the week with some worrying news for the bulls, but with a huge relief for the industrial consumers: the great white sugar delivery in London shows that the physical market is abandoned. That’s what we have said here several times.
We have seen over the last months a dichotomy between the negotiated price on the futures sugar market (be it in NY or in London), represented by the future expectation of the trajectory of the sugar price and deeply influenced by the appetite the funds have for risk, and the effectually negotiated price on the physical market (translated by the basis). These differences are highlighted and put to the test right when the derivative (futures market) is delivering (physical market). And that’s what happened in London – the physical didn’t validate the futures.
Great volumes delivered on the maturity of the futures contract are – most of the time – an unquestionable sign that the best buyer at that moment is the exchange. Therefore, the seller didn’t find on the market a better price than that hedged by it through the sale of futures contracts at the exchange and, consequently, delivers his product on the maturity abiding by the rules set by such contract.
In London, almost 540,000 tons of refined sugar were delivered on the maturity of December’s contract. It might look like a small number compared to the recent VHP physical sugar deliveries against the NY contract, which went over a million tons, but you should take into consideration the fact that the open interest in NY is 8 times larger than that in London on average. That is, the impact of the delivered volume in London is as if 4 million tons of sugar were delivered in NY. And even worse and more resounding is that great part of the delivery – 440,000 tons – came from Dubai, home to one of the greatest sugar refineries in the world. Now, good luck on trying to convince the sugar world that this delivery wasn’t bearish.
New York, whose futures market closed Friday with March/2017 at 20.15 cents per pound, a 34-dollar fall per ton against last week’s closing, wouldn’t have responded any differently. The real kept on devaluing against the dollar opening up one-off opportunities of pricing in real per ton. I heard about a mill which took the opportunity and fixed sugar for March/2017 at unbelievable R$1,773 per NDF (nondeliverable forward) ton with polarization premium.
Since the maximum traded at 23.90 cents per pound on October 3 for March/2017, the market has fallen nearly 400 points or 85 dollars per ton. In real, the maximum has fallen by almost 200 real per ton.
What can still drive the market up in cents per pound is the fine tuning we will have when we come closer to the beginning of next year with an improvement in the perception that we will probably have a smaller sugarcane harvest in the Center-South. This might boost prices in NY. Most mill owners I have been talking to are worried about next year’s sugarcane harvest which – consensually – shows signs it will be smaller than 590 million tons of sugarcane. Oil over 50 dollars per barrel improves the arbitrage of ethanol against gas, that is, the start of the harvest (interfering with May/2017) can produce less sugar. Over the last sixteen years, December’s average price of the futures sugar contract in NY has been above November’s on 10 occasions. And when that happened , prices went up 5.3% on average, that is, taking into account what November has done so far, the average prices in December could reach 22.50 cents per pound. On six occasions when December’s average price was lower than November’s, there was a 3.7% fall only. Using this reasoning, the price interval of December would be between 20.50 and 22.50 cents per pound.
On the other hand, some questions worry me (and that’s why I have insisted that fixing in real per ton at the levels we have seen should/must be taken advantage of): will the funds adjust their portfolios at the end of the year liquidating their long sugar positions? With Trump taking office on January 20, 2017, will the market tend to turn against risk moving away from commodities? Will the FED increase interest rates anticipating the huge investments in infrastructure that Trump campaigned on?
In the face of doubt, I recommend fixing prices using a combination of adequate appetite to the risk of the company: one part fixing in NY, one part fixing in at-the-money options to add value and another part making a fence, that is, buying an out-of-the-money put , selling an out-of-the-money call.
In short, prices can go up in cents per pound, but I am less optimistic now. In real per ton, I strongly believe we have seen a higher price. I will only change my mind if there is some strong exogenous factor I can’t see right now. But I am open to the always welcome inputs by our readers.
Archer’s survey shows that the debt of the sector at the beginning of November/2016 was R$85.93 billion, or 7.7% below the value over the same period last year. Not surprisingly, 2016 has been a year of reduction and solution of debts. The sector isn’t on the loose, but it is at least able to plan ahead.
Five months ago, I got an email from a reader in the US, previously in the sugar market, who flatly claimed Trump would be elected president of the United States. I admit I didn’t pay much attention to it. Aware of my hate toward Dilma, the reader argued that “the protest vote which pushed Dilma out is equivalent to the protest vote which will turn the democrats into opposition here. One has to live here to understand that”. And he said, “the Clintons have received US$230 billion since Bill left the presidency while Lula only got R$27 million through the Lula Institute”. As you can see, the world is full of honest people.
Demarest Advogados and Deloitte will hold the seminar “Paths to the Agribusiness” on November 30 in Campinas (SP). The event has Archer Consulting’s institutional support. For further information contact vjardini@demarest.com.br
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Have a nice weekend.
Arnaldo Luiz Corrêa
