In the short week due to the Easter holiday, the sugar futures market in NY closed Thursday at 12.78 cents per pound for the contract maturing in May/2019. With the usual boring performance, the market has been trapped between the 12 and 13 cents price range for almost 40 sessions. It takes some Tibetan monk’s patience to keep up with this market for 24 hours.
The annualized volatility of the sugar futures market in NY, based on the 20-day moving average, is 18.45% while, for example, if we look 200 days, it goes up to 27.21%. When the volatility of a commodity plummets, it means that the risk seen by the participants of the market has decreased and, as the funds usually seek riskier assets to exceed the performance of their portfolios (if it weren’t so, it would be preferable to put money into treasury bonds), markets with low risk keep speculative funds away. In other words, our opinion is that the funds can get out of their short positions and in order to do that they will obviously have to repurchase the market. We just don’t know when that will be.
In the disputed Canaplan event that took place in Ribeirão Preto last week, one of the most valuable lectures deserving special attention from traders and decision-makers was the one by two brilliant UNESP professors, Professors Cruciol and Figueiredo. In their joint presentation, they pointed out that the sugarcane in the Center-South in the current harvest will be more fibrous, losing juice and productivity due to the lack of rains during the period when the plant needs water the most. They say that the recent rains won’t fix the damage suffered by the cane because of the water shortage back then. The loss, according to them, is irretrievable.
This is an extremely relevant point which contributes to validating the fundamentals we have been discussing here every week and shed doubt on the optimistic forecasts which go around the market about the size of the sugarcane size. The equation is pretty simple: less sugarcane and smaller expansion of the sugarcane field added to smaller productivity comes to less ATR; however, we have seen in some forecasts on the market betting on a harvest above 580 million tons.
Sugarcane crushing is running late. Some mills report that after 19 days of harvesting, from 6 to 7 days have been lost so far. So, the mill yards are packed with trucks waiting to load ethanol, while the sugar terminals suffer because of little merchandise arriving to be loaded. Ethanol price skyrockets and distorts the arbitrage with sugar even more which in order to compete with the renewable fuel will need to go up by at least 200 points. The thing is when and if this will happen.
Some inconsistencies on the futures market disrupt a more thorough analysis of the global situation. For instance, the October/2019 with March/2019 spread makes the analysts scratch their heads. The spread shows a 94-point discount over five months, which represents 18.50% per year. Why should we have such a discount considering that the Center-South might have little availability of sugar due to ethanol price? This is a puzzle to be unraveled.
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. Over 1,000 professionals have already attended it and they consider it to be the best course on agricultural derivatives in Brazil.
I wish all our readers a Happy Easter.
Arnaldo Luiz Corrêa
