The week has been devastating for the futures sugar market. March/2017 closed Friday at an almost 100-point fall against the previous week at the NY exchange. There was also pressure on the trading months which reflect the 2017/2018 crop in the Center-South: May/2017 fell 69 points whereas March/2018 fell only 7 points. The following crop year closed at higher quotes. The pressure, as we can see, is on shorter maturities.
Those who have been on the commodity market for years, like this scribe, don’t get so surprised at the frightening market fluctuations, almost always leaving the participants dumbfounded by the magnitude of the volatility. For better or worse, by the way. When in the weekly comment entitled “Two Different Worlds” in April we said that given the fundamental picture of sugar, it was reasonable to think March would go up to 18 cents per pound in the last quarter of the year, a lot of readers doubted this would happen, for they understood that sugar prices were lucrative. At that time, NY was trading at 15.26 cents per pound and the world’s sugar deficit was already on the agenda.
Price fluctuations on liquid markets such as sugar always overreact. The herd maneuver featured by the funds create artificial high or low values depending on how they are positioned on that market or on how fast they liquidate those positions. Time and again we have written here about the existing dichotomy between the price traded on the futures market fed by the funds, which were frantically buying sugar contracts, and the price traded on a sluggish physical market, reflected in the incompatible discounts with the picture provided by the futures. Plus, recommendations that the mills fix sugar prices on export at the extraordinary levels in real per ton which were being traded on the market (above R$1,500 per ton) abounded here.
This exuberance seems to have come to an end. Sugar will need good fundamental news if it wants to see the bearish mood which has taken shape after a 600-point devaluation early October to be reverted.
At that moment when the market traded the 23.90-cent-per-pound high, in that week’s comment “It’s best to prevent”, we pointed out the fact that “our reasoning gets contaminated [under the illusion that prices are on a constant high] and develops a strong inner conviction that prices will rise indefinitely despite the opposing evidence surrounding the environment. This obsession over continuous high prices is almost like some pathology”. We even gave the example of what had happened in two previous occasions: the first one in January 2010 when the premium topped 90%, evaporating three months later. That is, premiums do evaporate. At that time, I heard people say they would only fix prices above R$2,000 per ton.
Extremes such as these “gauge” the market. Some people saying they would fix sales if the price were above R$2,000 per ton; others – as in the case of a big buyer – who last May believed he would buy sugar at 11 cents per pound. What lesson can we learn so we won’t make these mistakes, which create huge losses for the mills that haven’t fixed prices when they can afford to, again? What lesson can we learn from not fixing in NY the part corresponding to the sugarcane of third parties because of the Consecana which, under these specific circumstances, jeopardizes not only the mill but also the sugarcane grower?
What can change the mood now? Some key points which the market participants haven’t picked up on yet: a possible crop failure at the level of 540-545 million tons of sugarcane (still a too small possibility); oil at 75 dollars per barrel (analyst Samuel Levy sees this possibility coming true if prices go over a 62.50-dollar-per-barrel resistance, but still too far away); the real appreciating against the dollar (under the current political scenario, it’s difficult to believe the dollar will get down to below R$3.2000); regulatory relaxation of derivatives (Dodd-Frank) under Trump’s presidency, increasing the money flow toward risk assets (could that happen?). In short, it pays more not to lose the focus on the values in real per ton one plans to work with. The purchase of a put and the sale of a call shouldn’t be discarded.
The industrial consumers should also watch the purchase opportunities taking, if applicable, the reversed position, that is, the sale of a put and the purchase of a call.
Speaking of which, the volume of calls traded on Thursday was impressive: 45,000 calls against 17,000 puts, that is, the market is showing these sales have taken some toll on it, as usual went overboard on the fall and is looking for gain opportunities if it goes up again. Besides, 5,000 call spreads of 18.00/21.00 were also traded, a strong argument (and trade) for those who bet the market might stay within this price range.
Registrations for the XXVII Intensive Course on Futures, Options and Derivatives – Agricultural Commodities sponsored by Archer Consulting are open. Put it down on your daily planner – March 14 (Tuesday), 15 (Wednesday) and 16 (Thursday), 2017, from 9:00 am to 5 pm in Sao Paulo, SP at the Hotel Paulista Wall Street. Make your reservation because we have limited openings. For further information, contact priscilla@archerconsulting.com.br
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Have a nice weekend.
