The sugar market closed the short week due to the 4th of July holiday in the USA at a 53-point low (a 12-dollar drop per ton) for October/2014, which closed at 17.79 cents per pound. The other months closed under less pressure, a little stronger for short term maturities and less meaningful for long term maturities.
To some traders, sugar delivery for July/2014 in NY at less than 40 thousand tons was constructive for the market since there was no Brazilian sugar being delivered, almost a feat for a month like July. In fact, not even in July last year was there Brazilian sugar delivery in over 140 thousand tons. Looking back on it, July/2012 delivery did really well reaching 1.1 million tons – almost all Brazilian. In both 2012 and 2013, with substantially larger deliveries than those of this year, the market reacted positively the following month with higher average prices for October than the closing price for July. That is, there is no pattern of behavior. It is just random. We are the ones who have difficulty dealing with it that way.
October/14 spread with March/15 shows an implicit carrying cost of more than 20% a year.
The funds are heavily positioned on the buy side and the fall triggered by the lack of demand and rollovers of position have made them settle their positions partially driving the market to sensibly lower levels. The open interest went up about 100,000 contracts (June against May) in a month and the average volume registered in the two months show a substantial business growth – 90,000 contracts on average in May against 165,000 contracts in June.
The average open interest in NY this year has been 821,000 contracts and it has reached 893,000 contracts at the most. Last year, the average was 838,000 contracts. And in 2012, the average was 694,000 contracts. That is, sugar has not been hit that hard when a lot of banks have abandoned commodities in general. A lot of European banks have driven away from commodities not only in physical but also in proprietary positions. On top of that, there are regulatory agencies looking to restrain price manipulation. “Trading commodities has turned into a priesthood full of regulations”, a former trader from a big European bank said. Because of that, the volumes drop, volatility shrinks and money flies to other places with better risk/return relationship. Sugar isn’t that bad, though.
There are several factors we can discuss here as to what direction the market is taking the next days. We are in the second semester and the best perception of the size of the sugarcane harvest and volume which will be destined to sugar can set the tone and stamina which so many people expect. Also, let’s not forget El Niño. I will use a simple approach. The average trading price of the contract in NY, converted into reals by the closing exchange rate of the Central Bank, plus the polarization premium, has been R$895.36 per ton until June 30 this year. The highest price this year has been R$981.61 and the lowest price has been R$843.51. If we convert that into current dollar, it would provide a support of 16.64 cents per pound on the market and a resistance of 19.36 cents per pound.
The National Agency of Petroleum has released the consumption of fuel for May/2014: 981.1 million liters of hydrous and 3.716.3 million liters of gasoline C, a total of 4.697 billion liters, which means a 0.61% drop against the consumption over the previous month. In the 12-month accumulated, the total consumption has come to 54.351 billion liters, with an 8.55% yearly increase. On the whole, ethanol has 41% and gas has 59%. The absolute increment in consumption over the last 12 months has been 4.28 billion liters, of which 99.5% has been provided by ethanol (anhydrous and hydrous). We still believe that in order to meet this additional yearly demand of ethanol, we will need to grow at least 25 million tons of sugarcane each year. We will need at least five new units a year crushing 5 million tons.
The model developed by Archer Consulting finds that the total of sugar set by the mills for the 2014/2015 harvest reaches 18.4 million tons at the average price of 17.60 cents per pound, without polarization premium. The volume, if we take into account the estimate for Brazilian exports at 26.44 million tons, represents 69.60% of the total sales. Coincidentally, this is the same percentage we achieved last harvest at this time. The average value is equivalent to R$927.69 per ton of sugar, with premium included. The average dollar at the mills has been worked out at 2.2965 reals.
Archer is promoting the 1st Advanced Course on Agricultural Options, attending to requests from various agribusiness segments. It will be a 2-day course focusing exclusively on options about agricultural commodities. The course will be held on July 29 and 30 in São Paulo.
Have a nice weekend everybody.
Arnaldo Luiz Corrêa
