The sugar market in NY had a worrisome Friday closing at a steep 65-point fall (4.55% down) against the previous day’s session, hitting 13.75 cents per pound. Over the week, the performance was not as bad, dropping 28 points, or 6.17 dollars per ton.
Those involved in the everyday routine of the physical market of the sugar have difficulty understanding these sudden variations that we have seen all the time. The so-called algorithm systems which trigger purchases and sales before we can blink our eyes hardly know what a sugar cane is and we here on the other side try to use reason to explain these erratic movements. One time we attribute the high to the increase in gas and soon after that we justify the low because the harvest in Thailand is doing pretty well, thanks. Forget it. It is a total waste of time to try to fit our reasoning into the variations of the market which are ruled by sophisticated mathematical models. Sometimes they work in favor of the producers and then we find everything wonderful.
That is why the futures market sometimes detaches itself from the physical market, for better or for worse. The end of last year is a living example of this dichotomy. The sugar quotation at the NY reached almost 24 cents per pound while the negotiations on the physical market did not show this strength. Of course “rational” explanations justifying the high abounded. The rest is history.
When we are in the middle of this irrationality, it is important to look at the behavior of the spread to try and find an answer. It – as a general rule – depicts the movement or the expectation of the physical movement, in the short term, on the part of the participants of the market. It is not unusual for us to watch the spreads widen, therefore, demonstrating the weakness of the physical market, and right after that result in the decrease in prices on the futures market. The opposite also occurs: before an increase on the futures market mirrored in the expectations of movements on the futures market, the spread narrows in. In short, the spreads are excellent indicators to anticipate the trajectory that the price will take. Now what?
The week closed with the spread trading at 61 points against 66 of the previous Friday, after having traded at 55. Adjustment of the trading companies’ books, an anticipation of possible movement of high, improvement on the traded differentials on the physical or pure speculation is some of the factors. However, if on one hand, we have the funds rolling over their short positions in October for the next maturity (March) it is evident that this movement favors the narrowing of the spread (the funds buy back October and sell March), on the other hand, we have a volume of fixation on the part of the mills in the Center-South to be made against October (which expires this month).
It is exactly the huge number of lots to be fixed (which comprise those lots repurchased to take profit when the market was at 16 cents per pound, remember?) which keeps the market from consolidating at 14.00-15.00 cents per pound. That is, the vulnerability of the funds, which are 117.500 lots short, is being relaxed by the pending volume of fixations on the part of the mills (when would it be?). So, the market is heavier in the downturn. The “panic” factor also helps. The behavior of the market on Friday tasted like that.
However, think about that day when you leave home and look up at the somewhat cloudy sky and decide not to bring the umbrella because it does not look like it will rain. Then you start noticing that the clouds are suddenly coming together and getting darker and heavier, heralding a really bad storm. And you are on the street without an umbrella. The sugar market looks exactly like that.
Though the spreads are narrowing, the Center-South is following through on what it promised producing more ethanol, Petrobrás continues steadfastly adjusting the prices according to the foreign market and the funds are heavily short, the market does recover. The clouds are heavy, but it could be just a summer rain.
Put it down on your calendar: the XXIX Course on Futures, Options and Derivatives in Agricultural Commodities will take place on March 6, 7 and 8, 2018 in São Paulo, SP, at the Hotel Wall Street. The registrations will soon open. Don’t leave it to the last minute, because the current edition ran out 40 days ahead of time.
A breath of fresh air for the bulls: economist José Roberto Mendonça de Barros believes in the weakening of the U.S. dollar against the other currencies and this might strengthen the commodities. Oil, after Petrobrás introduced the policy of pricing following the foreign market, turned into an important component in sugar pricing.
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Have a nice weekend everybody.
