The futures sugar market in NY does its best to consolidate at about 13.50-14.00 cents per pound for the contract maturing in March/2019. NY closed this Friday at 13.72 cents per pound, a 25-point drop in the day, but just 15 points against the previous week.
In the October accumulated, sugar is leading among the commodities which have appreciated the most with a 22.59% increase followed by coffee, with a 16.89% appreciation. Now among the commodities which have dropped the most is gas, with 13.36%, followed by WTI and Brent oil, with 8% and 7% drop, respectively, backing up our opinion about the positioning of an array of non-indexed funds which held a long/short structure where energy was long and softs were short. Upon settling their long contracts in energy (by selling them), they also had to settle the short contracts in softs (by repurchasing them).
Why doesn’t the futures market go up any further, considering that at the current price level traded in NY, the producing countries direct competitors of Brazil have a production cost well above it? Well, the best mills of the country set their production costs (cash flow cost) between R$40.89 and R$45.39 per bag of 50 kg ex-mill, which today amount to 11.50 and 12.55 cents per FOB Santos pound, respectively. The other mills show a cash flow cost amounting to close to 14 cents per pound.
The fact is that, regardless of the group they belong to, a lot of fixation is being made by means of NDF (Non-Deliverable Forward), or structures with options that allow for a minimum price of return to the shareholder (it is recommended looking at EBITDA) through a fence which consists of buying a put financed by the sales of a call. In other words, nobody seems to be willing to cross their arms and not do anything waiting for better prices. But there are several reasons to keep the fixations up. Read them below.
The energy price drop forced the funds to settle their positions and this reflected against the fundaments (coffee, for example, went up pretty fast) or against what was thought to be an exceptional world sugar surplus. Get the reports that went around on the sugar market about two months ago and you will see, dear readers, how a lot of people with unsuspected reputation messed up big time. The sugar market is a merciless guru crusher.
With Jair Bolsonaro most likely getting elected as Brazil’s president in this Sunday’s election, there is talk that the elect president will release the names of those who will take up the ministries (which he said will positively surprise the society) as well as announce the main political, economic and fiscal measures for 2019. The market might respond positively to them immediately reflecting on a stronger real. This can make Petrobras reduce gas realization price even further at the mills impacting on the end price at the pump and narrowing the spread of this fuel with ethanol. There is an important factor running in favor of ethanol – the market gain acquired by the competitive hydrous price in comparison to that of gas over the last months has gotten the consumer “used to” ethanol and breaking this habit takes much longer.
On the other hand, there is an increasing perception that the new forecast for the Indian harvest to be released by ISMA (the Indian ÚNICA) this Monday can be below 31.8 million tons of sugar. It is also commented that the main refinery of the Middle East isn’t covered for its needs because it expected to buy cheap raw sugar from India, which didn’t happen.
The funds have changed over and are now long in the futures sugar contract by 12,500 lots (equivalent to 635 thousand tons), according to CFTC’s calculations based on last Tuesday’s closing. This can be an extremely important point if the market consolidates. I have seen the funds change over in other circumstances, not only in sugar but also in other commodities and when they realized that there was no support in the fundaments, they pushed the market back. That’s no reason to pop the champagne yet, but it could be the start of a new cycle.
The consolidation will come when the numbers from India become clearer and when we get a more concrete idea about the size of the next sugarcane harvest in the Center-South.
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. Vote keeping in mind the well-being of BRAZIL.
Arnaldo Luiz Corrêa
