Once again, the non-index funds increased the already unbelievably huge short position they have in the sugar contract in NY, setting a new record of almost 219,000 lots, adding on more than 30,000 lots in the week that according to CFTC goes from Tuesday to Tuesday.
Curiously enough, in another soft commodity – coffee – the funds reduced their short position causing the coffee prices on the futures market in NY to rise by almost 6%. In that commodity, the reduction came to only 1,500 – about 3% of its total short position, while in sugar, they increased the position by 16%. As the notional value of coffee is almost four times higher than that of sugar, I dare say that there has been a migration of the funds, settling the short position in coffee (buying back) and increasing the short position in sugar (adding more sales). Now, none of this is supported by the fundamentals of both commodities. It’s just an operation of risk exchange of the funds.
Look at what happened in London – a rise in white sugar prices dissociated from the physical market and controlled by the funds. A delivery whose recipient is a trading company that has refineries in Asia receiving refined sugar – that’s a flashing yellow sign.
Many signs are being sent out by the market, which, in our opinion, adds more fuel to the fire. A considerable number of washouts have occurred recently. According to an active trader on the market, the washout operations encouraged some trading companies to keep the long positions they had in futures (which would be absorbed by the fixation of the mills had the washout not occurred). According to him, some trading companies are less concerned about staying long at the levels the washouts were made. They bet on a market recovery.
So, let’s see: trading companies long with a small and manageable downside risk meaning less pressure by the mills to sell futures (given the reduction in sugar availability in the Center-South); rollover of contracts whose original fixation was for October or before that for March; prospect of reduced carryover stock of ethanol, which is still being traded at a healthy premium over sugar. The huge short position of the non-index funds is vulnerable, mainly because the question the trading companies ask themselves is who will provide the funds with liquidity if they decided to pull out of their positions?
What happened in London can happen in NY more strongly and intensely. We believe October delivery in NY – whose expiration takes place in two weeks – will follow suit with London. Of course, we might eat our words (and it won’t be the first time), but the odds that we might have the same recipient (trading company related to the producer) can make the yellow light turn orange.
There isn’t a single trader on this market who isn’t foreseeing a price recovery before the end of the year. Even those who had been negative have now turned neutral and have taken the opportunity to position themselves with some pretty cheap out-of-the money calls since the volatility has been generous to the buyers.
These are hard times for decision-making. Aspects that didn’t exist fifteen or twenty years ago deeply affect the erratic behavior of the market today. On one side there are traders, CEOs, CFOs, managers of various philosophies and nuances, and on the other side, there are physicists and their mathematical models that feed algorithms and robots. It’s undoubtedly a tough fight; however, rarely have we seen the fundamentals not prevail on the commodities market and we don’t believe we will this time around.
The trigger for the funds to settle the short position in sugar, repurchasing it, might come along in some ways: a shock in sugar availability in the world, be it due to an extraordinary reduction in the product availability for the free market, be it due to the perception of a modest recovery/expansion in the Center-South for next year, or be it due to a sudden rise in energy prices on the world market. Of course, we never know when the next black swan will land.
Make a note on your calendar – the XXXIII Intensive Course on Futures, Options and Derivatives should occur in March/2020, on March 24, 25 and 26 at Hotel Wall Street on Rua Itapeva in São Paulo. Wait for confirmation.
Have a nice weekend.
Arnaldo Luiz Corrêa
