The sugar futures market in NY closed Friday at a huge around 4% fall, hitting 12.47 cents per pound for the March/2019 contract. In panic situations such as the one we witnessed on Friday, everyone runs back and forth wanting to find out what has happened in order to explain such blood bath, but the reality is that nobody knows why and so stories to try to bring logic to something that doesn’t have any are adapted.
An explanation can be the volume of open contracts in NY, which have spectacularly increased over the last days, adding on more than 35,000 lots in five sessions. It appears, according to this trend, that the non-indexed funds have added new sales to their positions. It’s not known how much the funds are sold in total because the CFTC hasn’t been releasing the position of the principals (COT) due to the US government shutdown.
Others believe that the funds were actually zeroed out and settled the purchases they had recently made, selling back to the market. And the increase in the open position was due to new purchases (on the part of the funds, which gave back on Friday) and new sales (commercial). We will have to wait to find out who is right when the COT is released (God knows when that will be). I have never seen such a difference between two opinions about the market position.
On the other hand, a market executive believes that some mills were hoping that the futures contract maturing in March could break and trade above 13.00 cents per pound making it possible for the mills to hedge their positions against that maturity month which still needed fixation. Since the stay above 13 cents was only for a short time, the fall in quotations on the floor on Friday was sped up by the fixation of the mills “at any price”.
Local news shows that the sugarcane harvest in the Center-South might be much smaller than the 572 million tons being commented on. It’s known that some mills in a pretty deteriorated financial situation will stop crushing this year. The lack of rain in the sugarcane regions up until the middle of last week worried the agricultural area of several mills. The rainfall level in some cities such as Ribeirão Preto, São José do Rio Preto, Uberaba, Uberlância and so on hardly reached 25% of the volume seen last year over the same time period.
Lower rainfall level in India was highlighted in traders’ conversations. The India Sugar Mills Association (ISMA) has reduced its harvest forecast to 30.3 million tons of sugar, a number which is pretty close to the 30.8 released by Archer Consulting to its clients in October last year.
There was no change in the fundamentals last week, but the funds guided by algorithms and mathematical models couldn’t care less about this as long as there are traders on the other side of the table pulling their hair out trying to understand what the hell is going on with the market and helping take the NY quotation to where they want.
The XXXI Intensive Course on Futures, Options and Derivatives in Agricultural Commodities will be held 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). The number of spots is limited. For further information, send an email to priscilla@archerconsulting.com.br. We recommend that the participant read the book Derivativos Agrícolas (Agricultural Derivatives), which can be found at iTunes, Amazon, Livraria Cultura or www.estantevirtual.com.br, before attending the course.
Arnaldo Luiz Corrêa
