The futures sugar market in NY showed another devastating performance over the last week. It plummeted with falls that came to 131 points in the week accumulated, or nearly 29 dollars per ton at the first contract, which closed at amazing 13.74 cents per pound.
The other months along the curve which goes through May/2020 also suffered falls between 23 and 29 dollars per ton. Prices have reached the lowest level since February 23, 2016. It so happened that on that day, NY’s closing with the real badly hurt amounted to R$1.274 per ton. This Friday’s closing, in real per ton, was 19.36% less: R$1.027 per ton. Actually, we are at the lowest price in real per ton since September 22, 2015.
The sugar price collapse since the year’s 21.49-cent-per-pound high, on February 6 was 775 points in 82 sessions, a 36% fall. On February 17, we alerted our clients that if nothing changed in the fundamentals, prices would plummet as of April, according to our model. The average NY’s closing price in April was 16.32 cents per pound, 20% less than the average price in February (20.41 cents per pound).
This big a fall (775 points in 82 sessions) is rare. The last time it happened was in May 2012 when the market was starting the 2012/2013 harvest at much lower prices than those practiced at the peak of the off-season period. From 2010 up to now, if we compare the day’s closing with the maximum registered in the previous 82 sessions, we have come to 380 points on average. We have seen this week is the double.
I would like to point out a few points that have contributed to the fast fall in sugar prices over the last month. The first blow was struck by the physical delivery of sugar on the maturity of March futures contract led by a great producer, exactly in the off-season period in the Center-South. The physical market understands that if a great producer delivers 900 thousand tons in late February, this delivery is a clear sign that there are no interested buyers and the exchange ends up being the ultimate possible destination for his hedge.
The second blow was the exchange rate, which contaminated with the awful national political situation, puts the economy on hold, increases the risk perception and devalues commodities, among which is sugar.
The third blow, but not least important, was the decrease in gas price by Petrobras by 5.4% increasing the fear that we will have more sugar being produced due to the pressure on ethanol parity, causing an avalanche of sales on futures sugar contract in NY.
In addition to the mentioned points, we have some hidden risks that might come out of hiding at any minute bringing, even more, devastation to prices. We have been very clear in our comments that we are total against the hedge repurchasing by mills, for this infringes the good risk management practices. It is known that some make use of this alternative to create cash flow, paying the trading companies a toll. Now they are about to lose 200 points and to have to go back to the market at some point to fix their sales. This will pressure the market sooner or later.
In addition to this damaging strategy, there are about 24,000 lost of puts around the exercise price of 15 and 13 cents per pound to finance the purchase of out-of-the-money calls, whose greatest part refers to the structures aiming at making profits in an eventual price recovery, which hasn’t happened (at least up until now). This huge volume of puts, which matures on June 15, might trigger stop-loss operations which will put more pressure on the market.
The rupture of the levels from 15 to 14 cents in just three sessions was traumatic and unleashed, as usual, all kinds of talk about even more discouraging scenarios. Seasonally, May is a low price month.
The hidden risks can and will make a difference. And the futures sugar market will stress out to the point the blood is stemmed. Since markets overreact to highs and lows, it’s difficult to set a limit to insanity.
The blood bath we have been watching serves as a warning for several discussions promoted here – among which about Consecana. Mills that didn’t fix their sugar corresponding to the sugarcane of third parties lost money and so did their suppliers. A formula that wipes out wealth. Not even Einstein would have been able to come up with such a formula.
Another discussion is about risk management. Companies need to have a professional and unbiased policy focused on this. The amount of money that is lost in the sector just because of neglect to elaborating and conducting an efficient risk policy is unbelievable.
In conclusion, it’s important to remember the lousy performance of the energy market: natural gas with a 19% fall, heating oil 14%, oil 11%, gasoline 6% and corn ethanol 4%. And sugar had the second worst fall among the agricultural commodities, 30%, losing only to orange juice, 32%.
There are strong rumors that great producers are starting to sharpen their pencils and make calculations to reduce the sugar mix. We don’t have the habit of correcting our harvest forecasts. We only make one or two at the start. Our only one for this 2017/2018 harvest was released early January this year, at 586 million tons of sugarcane. However, given the income shifts (inferior sugarcane) and mix (as mentioned above), our early sugar production number which was 35.54 million tons of sugar can be reduced by 1.5 million tons of sugar.
Archer Consulting 28th Intensive Course on Futures, Options and Derivatives – Agricultural Commodities (in Portuguese) will be held on September 19 (Tuesday), 20 (Wednesday) and 21 (Thursday) 2016 from 9:00 am to 5:00 pm in São Paulo, SP at the Hotel Paulista Wall Street. Don’t leave it to the last minute and enjoy our discounts.
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Have a nice weekend.
Arnaldo Luiz Corrêa
