After the yearly sugar event in Dubai, everybody came back home with that feeling that always arises at the end of meetings on that side of the planet. Just like previous years, nothing happened. I want to make it clear that there is no criticism here of the high-end event itself. It’s just that the market is so boring that nothing happens anywhere in the sugar universe.
Sometimes this feeling that nothing happens can cause the traders to take positions on the derivative markets betting on the total and absolute freeze on prices. It’s a favorable environment for going short out-of-the-money options, right? See below the price paid for entering this line of reasoning.
Before talking about this, I need to comment on the email received from a reader who implies that I butter my own bread every time I talk about risk management, considering that Archer Consulting is a risk consulting company. That is, that I have shown gloomy scenarios to be able to subliminally sell solutions. Nobody will stop dying if funeral homes close, just as it will keep raining somewhere on the planet even if we close every umbrella factory. Failures in risk management – and as much as I want to ignore them, they will continue to exist – are as common as death and rain.
Well, the themes of the weekly comments invariably focus on the importance of the proper value to be given to risk management. It’s impossible to set it apart from the daily routine of the commodities related companies. And last week particularly showed us once again this issue should be treated with special attention by managers and counselors in Brazilian agribusiness companies. I will explain.
On Friday, the sugar market in NY closed the session at 13.21 cents per pound, a sharp high of 60 points against the session on the previous day, in a week when prices stayed within a very narrow price range. It doesn’t look like there are changes in sugar fundamentals.
It so happens that before the start of Friday’s session, date of the options expiration, there were more than 11,000 lots of calls at exercise price of 13 cents per pound. Short traders should think the calls would expire without value, or as it is said in market jargon, they would turn into dust. The sugar market was left aside through most of the session. However, things changed over the last hours.
When the March contract was coming up on 13 cents, the more restless shorts started to cover their short positions and this action was certainly the trigger for the market to start going up non-stop irrationally. Many mills did the right thing and smartly took the opportunity to fix their prices. Those who sold options because the market had been put on hold might have been hurt.
I wonder if the movement will continue on Tuesday – the exchange will be closed on Monday due to the holiday in the USA. Was it enough to scare the short funds, whose position we still don’t know exactly because the American government shutdown delayed the control and we are still behind the numbers? These are questions without answer.
Back to the risk management issue, the coffee market has the worst performance among the soft commodities during last week, melting 4.26%. What caused such debacle? According to market rumors, the sudden fall seems to be caused by the compulsory settlement of a long position belonging to a Brazilian coffee exporter through a over-the-counter structure – a “wonderful” business known as accumulator.
Those who follow us know how critical we are of this kind of operation, not because it is doomed to fail, but because from experience through these years, I notice that a reasonable percentage of the companies that use it seem to have no idea of the extension of the risk they incur in. Accumulators can be useful for the wise trader with a speculative bias, but they are usually a disaster for those who use them to replicate the hedge. But speaking about accumulators has less efficiency than if I preached the Gospel in the Sahara desert. The sad side of the story, keeping in mind that as far as we know they are hearsay, is that the word on the market was that the loss such company had was around tens of millions not of reals but of dollars, of course. After all, accumulators are for people who have dough, or did.
There are very few spots left for the for 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.
Have a great weekend.
Arnaldo Luiz Corrêa
