New York closed the week with the sugar futures contract trading at 12.74 cents per pound for May/2019, with the same price interval of many weeks. We have been tied up to the narrow space between 12.08 and 12.95 for exactly 33 sessions. I can just imagine how boring it must be for the sugar futures brokers and analysts to have to write every day about a market that cures just about any insomnia problem. The annualized volatility of these 33 days is smaller than 19% – way too low compared to the historical average.
According to a CFTC report, the funds reduced the short position to 77,500 lots; however, the market response was very disappointing. But the issue that comes up is whether the funds couldn’t turn the short position into a long one more smoothly. It’s early to say we have a new ball at play; yet, it seems to us that the market still hasn’t gotten excited about the fundamentalist news; at the least, it looks like the price floor has been raised.
What happened to ethanol this week – going up vigorously – along with an eventual change of moods on the part of the funds can be the spark of what we talked about last week – a spark to ignite the price recovery. The hydrous price went up by 15% over the week reaching R$1.8962 per liter, approximately equivalent to sugar in NY traded at 15 cents per pound FOB Santos.
The upcoming scenario for 2019/2020 is more constructive, for we will surely have a reduction in Indian production by more than 3 million tons of sugar. Brazil might also suffer a reduction in production this crop, which would deepen depending on how detached the arbitrage between the sugar and ethanol is (like it is now, for example). A scenario that combines a reduction in sugarcane production, a reduction in sucrose per ton of sugarcane and an increase though small in the consumption of the Otto Cycle can be extremely favorable for sugar in terms of price.
Everybody likes to hear about price predictions, but they are hard because price is about a combination of a series of uncorrelated variables (dollar, oil, GDP, consumption, among others) and affected by exogenous movements which cause sharp volatility, completely detaching the value (not the price) of the commodity either underrating or overrating and leaving the decision makers in panic. My hunch is that we will reach 15 cents per pound in the second semester.
It so happens that once in a while the irrationality takes over and makes us believe, for example, that the sugar market could have dropped more when it got to 10 cents or that it could have gone up more when it got to 30. It takes a lot of rationality.
The important fact in this crushing period that is starting in the Center-South is that never before has the decision-making in the sector been extremely flexible, at the will of the arbitrage between sugar and ethanol. That is, the decisions will be based on the spot market. Just think how difficult it is to correctly draw up a strategic plan to take advantage of the huge volatility we will have in the months ahead. Being aware of that, the trading companies reduce sugar purchasing or introduce restrictive clauses of wash-out for sugar supply contracts for export. On the other hand, if the sugar availability is reduced, the basis (premium) will go up. I believe that the sleepiness we have on the futures market today will dissipate faster than we think.
Another mill in the Catanduva area has filed for judicial recovery this week. Just like it happened some weeks ago, one of the minority creditors (a bank which holds only 8% of the total debt) filed execution proceedings against the company. It’s impossible to understand the behavior of some banks, whose executive pocket huge bonuses, hastily pushing – as it happens in this specific case – a company into judicial recovery.
The mill in question has a debt of R$270 million, which represents about R$168 per ton of crushed sugarcane, pretty close to the average of the sector, which according to an Archer Consulting survey is R$160. In other words, it is far from being a mill which was fated to failure. For the sector, it is another piece of bad news. For the sugarcane supplier, it is a reason to be scared and to question whether or not he should continue with the sugarcane culture.
Have you set aside the date on your calendar? The 32nd Intensive Course on Futures, Options and Derivatives – Agricultural Commodities, which has already gone over 1,000 students, will take place on August 27 (Tuesday), 28 (Wednesday) and 29 (Thursday), 2019 in São Paulo, SP at the Hotel Wall Street near Paulista. Don’t leave it to the last minute.
Have a great weekend.
Arnaldo Luiz Corrêa
