The sugar market in NY closed Friday at 12.78 cents per pound, a pretty strong increase against the previous week, which closed at 12.22. We watched the maturity of the NY sugar futures contract for July/2019 followed by an amazing delivery and a 2.1-million-ton sugar record, break the earlier mark, which happened in May/2015.
Bulky deliveries are usually perceived with the undisguised bearish tone, but we cannot generalize and say this one falls into this category. Such a volume evidently shows that the sellers (curiously 97% of volume of companies based in Asia) didn’t get a better price than that traded by the Exchange, or couldn’t get rid of the sugar they had at the origins without offering discounts, which inevitably would have to be higher than the carrying charges itself until the buyers presented the vessel.
We should carefully ponder that a delivery at this time of the Center-South harvest in which nearly 30% of what is estimated to be crushed has already been crushed can be a huge incentive for the mills to keep benefiting from ethanol production and, therefore, they can head towards a meaningful decrease in sugar for this harvest’s mix.
The question, according to a trader, is why is a trading company with refineries in Australia, India, Indonesia, Morocco and New Zealand delivering sugar and, among the recipients, why are trading companies linked to producers taking delivery? Is it just a one-off situation? Could the fact that China has issued sugar import licenses granted up to the limit of 1.35 million tons have opened up room for sugar arbitrage from other origins and played a role in the delivery? Let’s look and see.
Sugar price rise in NY on Thursday, the narrowing of the July/October spread a day before maturity, and the strengthening of other spreads along the NY price curve, show that several market operators are actually worried about the changes in the sugar availability for the third and fourth quarter of the year. It also explains, according to another market executive, why companies such as Alvean, a joint-venture (JV) between Cargill and Copersucar, would be stopping sugar. By doing so, they are basically operating the arbitrage between sugar and ethanol, selling/producing renewable fuel which trades with a premium on sugar and buying cheaper sugar via stopping – it’s as simple as that.
In other words, receiving sugar in July can be a great buying opportunity. Ownership of a product on a future three-month horizon ahead, considering that the market has been in a pretty restrained price range, without any huge traumas and scares, is an interesting strategy while new elements gradually start making up the price scenario until October: sugarcane crushing size in the Center-South, harvest mix, how much India will produce in the 2019/2020 harvest, oil market if the conflict between the USA and Iran escalates, weather issues in the Brazilian winter.
If the sugar market explodes due to any of these elements or the combination of two or more of them, the current recipients will profit not only from price rise but also from the appreciation of the basis (premium) on the physical market, that is, it seems to us that the potential negative risk of such a strategy is limited. Is that a masterstroke? We have a couple of months to find out.
There is also the fact that the pro-ethanol start in the crushing of the current harvest broke out the emergence of wash-out operations, that is, the cancelation of sugar delivery contracts so that the mills could take advantage of ethanol’s good moment, which was trading above sugar. So, JV’s receiving would serve to equate the deficit caused by these wash-outs – these are only conjectures.
What will the market reaction on Monday’s opening be? It will depend on the origins that will be delivered. The more the Center-South sugar is part of the amount to be delivered, the narrower and, therefore, more worrying will the global availability for the last quarter of the year be. It won’t be from a lack of emotion that we will die in the second semester.
Over the last 8 calendar years, only in 2016 did we see the average traded price in NY in the second semester of the year be above that traded in the first quarter. Up until now, the average price of the semester, which ended last Friday, has been 12.49 cents per pound!! When the second semester excels the first one on average, the appreciation is 13%. This is another one to be checked out.
Did you know that 1,000 professionals on the commodities market have already attended what they think it the best course on agricultural derivatives in Brazil? Don’t leave it to the last minute – after this one, only next year. 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.
Everybody have a nice weekend.
Arnaldo Luiz Corrêa
