March 1999 – The sugar market was agonizing over the fluctuating prices between 5 and 6 cents per pound. At that time, a trading company summoned up producers for an important seminar in Guarujá, São Paulo seacoast. Baffled, they heard from the main trader of the trading company a long list of reasons which concluded that the sugar futures market was quickly and unmistakably headed toward two cents. No, no, it was NOT a joke: it was two miserable cents per pound!! To put this event into the perspective of what this represented back then, the FOB equivalent sugar production cost was about 6.50 cents per pound and the futures exchange in NY had a position of open contracts at about 180,000 lots.
Two cents was an exaggeration since in order to continue crushing without paying the sugarcane suppliers, the mil would have a cash cost of 3.84 cents per pound. In early May that year, sugar hit 4.36 cents per pound. The consequence of low prices was a drastic reduction in the sugarcane supply (practically 1/6 of the sugarcane fields which had not been renewed due to the cash flow which had bled the previous year). A year later, NY was trading at 7.30 cents per pound and once the lack of the product for the 2000/2001 harvest was confirmed, the market skyrocketed to 11.40 cents per pound some months later. The two cents never occurred.
May 2010 – The sugar market in NY was trading at 13 cents per pound and humours at the Annual Sugar Dinner at the Waldorf Astoria in NY were pretty sour. The wisdom that emerged from the gurus on duty showed that the market would certainly go for the 10 cents per pound. The more skeptical people predicted that 8 cents per pound were pretty possible. Brazil was going to have a record harvest of 560 million tons of sugarcane and 34 million tons of sugar. The ATR was way above the ATR of the previous year. It seems that 8 cents per pound was a quick win. The buyer looked at the prices with scorn. Importers used the stocks at the destination before thinking about rebuilding their positions. What happened after that? Rain, crushing delay, jammed ports, rain in Santos for 38 days, endless lines of trucks, premiums exploding and only 100 sessions later, the price had doubled to 26 cents per pound! The ten cents never occurred.
February 2011- Sugar hits 36 cents per pound. A fund manager from Asia claimed from atop Mount Olympus, where they live off huge management fees, that sugar would reach 66 cents per pound. The mills got really excited, some even thought about buying calls of 40 cents per pound. Well, why not? This belief was strengthened by the fact that Jim Rogers, legendary investor, always wearing his flawless bow tie, worshipped by a horde of fanatics, say that sugar would get up to 75 cents per pound, the highest price since November 1974. What happened after that? Well, the market started a downward trajectory, combined with the devaluation of the real and reached 18 cents (therefore, half) a year later. The largest value in real per ton (inflation-adjusted) obtained by FOB equivalent VHP sugar was in January 2010 when NY was trading at 29.90 cents per pound and the real was at 1.8850. The 66 cents per pound never occurred.
May 2016 – It is the same scenario as the Annual Sugar Dinner. Sugar was trading at 16 cents per pound. A great buyer who was walking around the carpeted hallways of Waldorf, predicted to the four corners that he would only buy sugar at 10 cents per pound. What happened after that? Well, the market absorbed the fundamentals and, helped by the long funds, hit 24 cents per pound. The purchase of sugar at 10 cents per pound never occurred.
August 2017 – The market closed the week at 13.41 cents per pound, slightly better than it did last week. The funds increased their short position even more. Now they are 122,000 contracts short. They have added on 38,000 lots in the week and sank the market by 80 points over the period. That is, it took 24,000 tons of sales in order to knock the market down by 1 point.
Where is the market vulnerability, in the hands of those who are long or in the hands of those who are short? It is not an easy answer. However, no matter how much new and amazing news they fabricate during the day, the bulk of the bearish news has already been in system for a long time – greater sugar production in the Center-South, increase in surplus, India’s producing more, turning sugar into a villain responsible for the increase in obesity. (No, it is not because a whirlwind of sedentary families stuff themselves with hamburgers and pizzas, with buckets of soda…the culprit if the sugar!!)
Some analysts believe there still is 20% of fixation to be made against October. If this is true, 20% over 10 million tons of sugar, which is the volume we estimate there is during the year to be fixed against this month. Using the same proportion of the previous paragraph, can we say that the floor of the market is 12.58? No way, today some gurus speak about 10 cents per pound.
I don’t believe in this volume of open fixation. And I see many mills simply changing keys, that is, they will produce more ethanol because it pays 4-6% better. The ethanol consumption is increasing. Oil closed well this Friday and it points – probably – to a price adjustment by Petrobrás and thus improving ethanol. Any spark on the perfect world of the bears can trigger profit taking on the part of the funds. Sugar leads the losses among the commodities in the year (31%).
PS: the lowest price in history was in January 1967 when sugar was trading at 1.23 cents per pound. The adjusted value by the American inflation in the period represents 9.01 cents per pound today. The 4.36 in May 1999 were the lowest in real values (today they would be equivalent to 6.41).
If you want to get our weekly comments on sugar straight through your email, just sign up on our site by logging onto https://archerconsulting.com.br/cadastro/.
Have a nice weekend.
Arnaldo Luiz Corrêa
