The futures sugar market in NY performed amazingly this Friday, closing the week at 14.63 cents per pound, the highest quotation over the last 60 sessions (almost three months). I wonder what drove this high. Will there be less sugar left than what the analysts were expecting (yes, I am being ironic here)? Or did the macroeconomic scenario make these commodities take a leap this weekend (coffee, sugar and oil went up well)? Did the market absorb a great part of the rollovers from October to March made by the mills and now can rise in the void in case the funds want to take profit? There are lots of questions.
An experienced professional sends me a message about the sugar market saying that “after over 35 years in this career, I confess that everything I know is that I don’t know anything”. Socrates would certainly agree with him.
The sugar market resembles a representation of the ancient Greek tale where the Goddess Hera sent the Sphinx (a beast with a woman’s head, a big bird’s wing and a lion’s body) to torment the dwellers of the city of Thebes. Whoever approached the city and crossed the path of the Sphinx got a riddle to be deciphered. Those who got it wrong were devoured by the monster. One day, Oedipus crossed the path of the beast, who proposed him the following riddle, “What is it that has four legs in the morning, has two legs at noon and has three legs at night?” Oedipus answered it correctly and the Sphinx got so furious that it threw itself off a cliff.
Among the riddles that could be proposed by the Sphinx today are, for example: what is the true global surplus? How much sugarcane will the Center-South produce in 2018/2019? How do we know India’s production with three decimal places after the comma? What will the mix in Brazil of 2018/2019 be? Will Petrobras keep the policy of transparency of fuel pricing? What will happen to oil in 2018 – will it stay above 60 dollars per barrel or below 45 dollars per barrel? Who will be the President of Brazil in 2019? (Depending on who it is, it is preferable to be devoured by the beast, not the candidate, in this case, the Sphinx).
Over these last two weeks there has been a profusion of analyses about the market coming from all directions. Some were bullish, others were bearish, and you reader who had access to some of them for a moment ask yourself if the analysts have gone bananas – sugarcane crushing predictions go from 560 to 630 million tons of sugarcane, surplus of 3 to 8 million ton of sugar, price prediction to 10 to 16 cents per pound.
In one of these analyses, which I must confess I did not have access to, but a client sent only a sentence saying “for the mills in bad condition it is better to sell sugar than ethanol because Petrobras doesn’t pay cash for ethanol anymore”. I wonder where this information came from. Could it have been from the Sphinx’s mouth? Well, the problem is what the mill can do with this information if it believes in it.
We all need information in order to make decisions. Inside the companies it is the crude coal we want to transform into diamond – we need quality information. I will give an example. This week an analyst who I admire, Phil Passen, said in his daily comment, “Another reason we think sugar is about to break out to the upside: The net commercial short is the lowest we have seen it in the last 5 years. If one goes back and looks at the commercial shorts vs flat price, we see there is an inverted relationship. That is to say, the less short the commercials, the greater the attempt at a rally”. Bingo! A simple sentence fished out of the middle of the report that could have made the week for a lot of traders and a lot of mills. And I am sure it did.
Well, what now? What about next week? What about next month? Sugar has improved a little, but it is nothing definite. The average price of daily closings of October is at 14.18 cents per pound, 25 points better than the average of September, but still well below what our model predicted (10% high). November will show, using the sentence of one of the dinosaurs of this market, “who is naked after the water of the swimming pool goes down?” We will have a better idea of how much the production will get to (many mills end their crushing in November). Anhydrous and hydrous price is still lucrative. Oil is going up and the real is devaluing (on Friday it hit 3.3000). This will drive gas price up and improve the arbitrage of ethanol with sugar.
The mills should stay tuned to the spasms the dollar is going through and take the opportunity and make NDF improving the fixation of the 2018/2019 harvest. The guided blowtorch will also chase the funds (short by 110,000 lots) that can repurchase their short positions and pocket the profits. These last two months might be more interesting than what was thought.
Either we decipher the riddle or we will be devoured by the monster.
By the way, the correct answer Oedipus gave the Sphinx is: “the human being”.
The book “Derivativos Agrícolas”, my partnership with journalist Carlos Raices, is available at some virtual bookstores such as Amazon Books, iTunes, Google Play, Kobo and Livraria Cultura: https://itunes.apple.com/br/book/derivados-agr%C3ADcolas/id1294585521?mt=11
The registrations for the XXIX Course on Futures, Options and Derivatives on Agricultural Commodities which will be held on March 6, 7, and 8, 2018 in São Paulo, SP at the Hotel Wall Street are already open. For further information: priscilla@archerconsulting.com.br
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Have a nice weekend.
Arnaldo Luiz Corrêa
