The non-indexed funds have reduced their short positions a little, now at “only” 205,500 contracts or 10.4 million tons of sugar. Over this period covered by the COT published by CFTC, from Tuesday to Tuesday, the market went from an 11.92-low to a 12.50-high. That is, in order to reduce 20,000 lots, the funds moved the market by 58 points. Based on the same report, it seems like the producers have fixed 7,500 lots. The contract maturing in March/20 closed Friday at 12.60 cents per pound, a 58-point high (coincidence) or almost 13 dollars per ton above the previous week.
If we used a simple rule of three, how much would the market have to move so that the non-indexed funds could cover 205,000 contracts? Six hundred points is the answer. Unfortunately for the mills and fortunately for the industrial consumers, that’s not how it works. But, if we at least took into account the arguments set forth on our comment last week about the funds having 1.65 lots for each lot the mills have to fix, it would be reasonable to think that instead of a potential 600-point high, who knows 350 (600 points divided by 1.65), which would represent 15 cents per pound? It doesn’t seem to be very consistent either, right?
The point is that 13 cents per pound does seem now to be more certain than ever. And according to a private comment made by an Indian executive last week, “If the world needs more than three million tons from India that will just happen if the market hits 14 cents per pound”. For now, the mills that rolled over October’s fixations to March have a big smile on their face.
The long-awaited huge sugar delivery on the expiration of October’s contract in NY, whose expiration will be next Monday, is definitely emptied out. A great sugar delivery now would make the foreign market recovery difficult, providing a picture (maybe a little mistaken given the fundamentals) that the demand is in the gutter. We will probably have sugar from Central America being delivered with no impact on the market.
Hydrous closed the week trading equivalent to sugar at 13.25 cents per FOB Santos pound, that is, about 60-65 points above NY.
Over the last ten years, on nine occasions, the average price seen on the first sugar contract listed in NY during October has been greater than that seen in September. Of course September average takes October’s futures contract as a basis and October’s average uses March’s futures contract. Over the last five years, on two occasions, October’s average price has been above 20% higher than that of September. This idea would set the average price for October at 13.86 cents per pound. However, conservatively, this price would be 120 points worse.
The Central Bank should soon make the life of financial institutions easier by softening the calculation of the market risk, reducing the demand of regulatory capital, and this will encourage banks to offer derivative operations with a smaller impact on the reference equity of the bank. The incentive to the banks can foster a hedge market of commodities that is still incipient in Brazil today. For the sector, it is an alternative of pricing for the mills (which today depend heavily on the trading companies)providing more flexibility to the risk management. An executive in the financial sector closely connected with the agro-business is pretty enthusiastic about these possible changes.
CVM (the Brazilian equivalent to the US Securities and Exchange Commission) has fined a company linked to the commodities sector (including sugar) R$5 million (US$ 1.2 million) for direct exchange transactions with another group company, which caused a fictitious loss for them. The operator has also been fined R$250,000 (US$ 60k).
Make a note on your calendar – the XXXIII Intensive Course on Futures, Options and Derivatives is confirmed for March/2020, on March 24, 25 and 26, at Hotel Wall Street on Rua Itapeva in São Paulo.
Have a nice weekend.
Arnaldo Luiz Corrêa
