In thirty trading days the futures sugar market in NY witnessed an incredible price recovery which treaded the way from a 9.83 cent per pound low up to a 13.95 cent per pound high over this period, that is, 412 points. Not even the most optimistic fundamental analyst could have expected such a significant market performance – 42% – within such a scant period of time. We believed that the sugar market would reach 13.50 cents per pound in the last quarter of the year, but we couldn’t have foreseen such a steep climb.
The last time such a huge increase has been seen over the same period of time was in the last quarter of 2015, when it reached 43%, and before that, in June 2011 when the market appreciated by almost 45% over the period. In the last quarter of 2010, a 48% appreciation occurred within a time frame of thirty trading sessions. In January of the same year, there was a 50% rise. But, the record belongs to June 2000, when the market increased 71.80% within a period of thirty trading sessions.
The huge world surplus of millions and millions of tons of sugar we hear so much about hasn’t withstood the logic or the simple arithmetic. We believe that the market has asked itself some questions, such as is it possible to stay bearish with the market trading at 10 cents per pound when nobody in the whole world can produce sugar and load it onto a ship at the port at this value? Is it possible to believe in Center-South production of 590 million tons of sugarcane, as occurred early this year, when it was known how old the sugarcane fields were, the lack of cultural treatments due to lack of money and the daunting reduction in investments? Is it possible to believe in a pro-sugar mix when the international oil price was soaring and the real devalued against the dollar, making ethanol extremely competitive at the pump trading premiums of 150/200 points against the sugar in NY?
If the market was more robust at this high, the question worth asking now is if the funds – which aggressively reduced their short positions – will start buying from now on and, if this happens, who will bring them liquidity? Some industrial consumers have a bitter taste in their mouths. They bought into the two-digit surplus story and now they get flabbergasted when they hear from selected consulting services that the surplus might turn into a deficit. WHAT? People who didn’t buy sugar because they were advised to hold out since the market would fall even further fraternize with people who sold because they were advised to do so for the reason that there was a lot of sugar on the market. How many times have we already seen this script?
Ah, but the funds will find liquidity by buying from the mills/trading companies that are fixing or will still fix. Well, everybody is talking about export reduction. Brazilian exports are estimated by some to be at as low as 18 million tons of sugar; if this is true, the need for hedge will certainly be smaller. Based on the volume traded over the past weeks, it is expected that the total fixed by the mills for the 2019/2020 harvest will go beyond 20%; let’s see what the model will say.
We have also said here almost to exhaustion and trying our readers’ infinite patience that some non-indexed funds were long in oil and energy and short in coffee and sugar. What actually happened? This October, gas, and oil have dropped by 8% and 5%, respectively, while coffee and sugar went up by 19% and 24%, respectively.
Sugar runs the risk at the moment of oil continuing dropping and the real continuing devaluing against the dollar. The combination of these two events makes import gas cheaper, pressures hydrous ethanol and can make the mills review their mix for the 2019/2020 harvest. On the other hand, Bolsonaro’s election (with a more than 90% probability according to some companies specialized in political risk) can warm up the consumer market if fiscal adjustment measures are implemented under the new administration and the increase in dammed consumption (both of fuel and food products and beverages) can be the counterpoint we need to balance out the mentioned danger.
An Indian executive asks us the following question, ”Since we know that both the Indian harvest and the Thai and European harvests are smaller, and also considering that the rain season in Brazil has hardly started, and, therefore, the weather risk still exists, why do Brazilian mills need to make the hedge now at 14 cents per pound? Wouldn’t it be better to wait for prices to react more strongly?” We answer that if the sugar mills in the Center-South have an average cash flow cost of production of 42 cents per pound ex-mill on average – which corresponds to about 12.25 cents per FOB Santos pounds today- it is hard not to fix prices once again.
Risk management is a valuable tool at this moment. Don’t fall in love with your position. Remember nobody breaks with money in the pocket. There are several structured operations which can be built at this moment, depending on the risk appetite of each company.
Registrations for the XXXI Intensive Course on Futures, Options and Derivatives in Agricultural Commodities, which will take place on March 19 (Tuesday), March 20 (Wednesday) and March 21 (Thursday), 2019 at the Hotel Paulista Wall Street, in Bela Vista, in São Paulo (SP), are open. For further information, send an email to priscilla@archerconsulting.com.br. We recommend that the participant read the book Derivativos Agrícolas, which can be found at iTunes, Amazon, Livraria Cultura or www.estantevirtual.com.br, before attending the course.
Have a nice weekend.
Arnaldo Luiz Corrêa
