The sugar contract for July/2019 traded at the New York exchange closed the week above the twelve cents, more precisely at 12.10 cents per pound, a strong 40-point recovery (9 dollars per ton) against last week. Although the price recovery is in line with what we have seen with the feet flat on the fundamentals, we need some market consolidation before stating that the reversal has arrived.
The funds, according to the COT report published Friday by CFTC, based on the previous Tuesday’s data, are still pretty short having reduced less than 3,000 lots. It’s very important to point out that both sugar and coffee went up a lot last week going in the opposite direction of the oil market. That is, it seems pretty reasonable to admit that part of the funds was long on oil and short on coffee and sugar. Their opposite movement coincides with what happened last year when sugar hit 14 cents per pound and then headed down to 13, 12 and touched upon 11. In short, is the price hike for real or just a consequence of the undoing of the position?
It’s still early to answer that. We need to watch if the funds will serenely keep their positions short on sugar or if they will come in covering their short position like there is no tomorrow. The fact is that, as we have said here, staying short at 12 cents per pound is something for those with nerves of steel and pretty deep pockets. Since money from the funds is money from the investor, the administration fee charged by them is already in the pocket, if you know what I mean. If they have to come in buying back vigorously, they certainly will.
The fuel demand number for April/2019 has been released: 4,468 billion liters of gas equivalent, which correspond to a 4.5% growth against the same period last year. The hydrous growth was 41.2% – a very positive number.
The corn situation in the United States has made ethanol price go up in a speedy manner on the Chicago market and can cause a ripple effect on the world ethanol market, with consequences even on the volume of ethanol Brazil was hoping to import for the North/Northeast region. If the demand of that Brazilian region is met by ethanol from the Center-South, the availability of sugar in Brazil will be even more affected.
Archer Consulting has reviewed its production estimate for the 2019/2020 harvest. We have increased the sugarcane production to 575 million tons, a slight increase in comparison to the previous number of 572, but we have reduced our forecast of ATR by 2.4% (from 136.96 to 133.75). Therefore, our second estimate puts sugar production at 24,183 million (it was 24,633 before, so a 1.8% reduction) and the ethanol production at 30,318 billion liters (it was 30,883 before, a slight 1.8% decrease).
The first four-month period of 2005, 2009, 2013 and 2019 has something in common: it was a period of small variations and very low average price volatility traded in NY. This resulted, in the first three, in a stunning price recovery in the last quarter of those years, when they were pretty close to the production cost. The highest monthly average price traded in these three years occurred in the last quarter. Is the pattern repeating itself? In other words, will the high of the year be made in the last quarter of 2019 in a very strong way?
For the final consumers, beverage and soft drink manufacturers, and food industry, whose raw material price is calculated based on the sugar price quote in NY, have an amazing opportunity to fix their prices in real. The reasoning is simple: if we take the price curve of sugar converted in real from 2014 up to now and adjusted by the IGPM (General Market Price Index), we will find that in just 4% of the times the price has been below 1,080 real per ton – NY’s closing this Friday.
For the producers, taking into account the fundamentalist scenario, everything points to the strengthening of the sugar prices – the more evident the points we are observing on the physical market are: consumption improvement of Otto cycle fuels, oil price stability at about 65 dollars per barrel – the lower the yield of the sugarcane field.
We believe that in the last quarter of the year, it will be hard for the sugar prices (March/2020) to stay below 13.75 cents per pound, which encourages the mills to roll over non-fixed positions in the future months closest to October/2019 and possibly March/2020. Because the markets usually exaggerate in their highs and lows, we wouldn’t be surprised to see more generous prices in a possible market peak – 15 cents; maybe 16 cents? Make your bets.
In a week coffee has gone up by 12.7%, sugar by 3.6%, while oil dropped 10%. Is it just a coincidence? In time: this Friday Petrobras has announced a reduction in gas price by 7.2%.
The 32nd Intensive Course on Futures, Options and Derivatives – Agricultural Commodities 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.
Have a nice weekend.
Arnaldo Luiz Corrêa
