There are two things going around the heads of nine out of ten commercial managers on the sugar market at the end of this month. First, mostly in regard to traders, the volume of the sugar delivery against the March which will take place next Tuesday, March 28, right in the middle of Carnival. There are people betting up to a million tons from Brazil, Central America and Argentina. Secondly, mostly among field people, there is the feeling that despite the rain in January, agricultural productivity is something to be worried about. We will be talking more about this.
About the delivery, there is always an endless argument whether the physical deliveries are a market sign of strength or weakness. I believe, with no science to back me up on this, that maturities that overlap with the Center-South full harvest, such as May, July and sometimes October, when a single recipient comes into play to embrace a huge amount a sugar, it is only natural that the market sees this gesture as being bullish. It conveys the idea that despite the full supply of the product, there is still someone willing to receive it because there is a huge consumer market to supply. But when a considerable volume (say 600-800 thousand tons, for I think a million is too much) is delivered against March, which in theory represents the Center-South off-season, the market can see that as a physical market weakness.
If someone sells sugar to be delivered against March, he knows that the buyer can nominate the vessel up until the first quarter in May and might do so for some of the following reasons: a) he didn’t get a better price for immediate delivery of the sugar he has and bets that the financial and storage costs to carry the sugar until the buyer nominates the vessel is lower than the discount on the spot market; b) the seller doesn’t have / didn’t produce sugar and takes it for granted that the buyer will nominate the vessel at a date close to its crushing for 2017/2018. There might be other reasons, but the two mentioned above, if by any chance portray the current moment, throw the doors open to a weak physical market.
The futures sugar market in NY closed Friday with March at 19.80 cents per pound, a 50-point fall against the previous week. It was a R$25-30-per-ton fall. All the maturities related to the 2017/2018 harvest closed at a 45-point average devaluation or about 10 dollars per ton. The H/K spread , which shows the perception of the trader toward the physical behavior and which even traded with a 128-point premium, just about hit zero now at the end. That is, while before there was concern that there would be a shortage of sugar a couple of months before the start of the harvest, now there is zero concern.
Dear reader, allow me to repeat the third paragraph from last week’s comment. I’m doing so because of its relevance (I will explain later): “the market will need to renew its fundamentals so that it can stay above 20 cents per pound. The 50-day closing average is at 19.94 cents per pound. The last time the market broke the 50-day average was late last October, 10 days after we saw a 150-point devaluation, reaching 200 in 20 sessions.” The 50-day average was broken with Friday’s closing. How will the market respond next week?
Do you want a bullish factor which can be strong and change the trajectory of prices? In a conversation with some people at Sigma, a company that specializes in geoprocessing, that is, it produces a detailed analysis by means of satellites about the sugar field, they said they believe that the Center-South today has a sugarcane area of 7.6 million hectares and that the expected average agricultural productivity is 75 tons of sugarcane per hectare (we have a very old sugarcane field). Doing the math, we have a sugarcane harvest of 570 million tons. According to current parameters, this is a decrease of a million tons in sugar.
We said this year was going to be volatile and the prophecy is coming true. Hold on tight because there are still more bumps ahead.
Hurry up! There is ONLY ONE SPOT left for the our Course in March. But don’t lose hope – write down the next dates on your calendar so you won’t miss Archer Consulting XXVIII Intensive Course on Futures, Options and Derivatives – Agricultural Commodities (in Portuguese) to be held on September 19 (Tuesday), September 20 (Wednesday) and September 21 (Thursday) 2017, from 9:00 am to 5:00 pm in Sao Paulo, SP at the Hotel Paulista Wall Street.
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Have a nice Carnival.
Arnaldo Luiz Corrêa
