The sugar market in NY has seen a spectacular price recovery over the last two weeks, reflecting the perception of the physical market that the cane crop perspectives of India and Europe will worsen. The futures contract for March/2020 closed this Friday at 12.76 cents per pound, rising only 6 points during the week equivalent to 1.30 dollars per ton. The other months went up further: May – 18 points, July – 19 points, and October – 21 points. That goes to show two things. First, many mills are still behind on price fixation and pressure March; secondly, the market considers that next year (2020/2021) will be more restrictive in terms of sugar availability.
A São Paulo-based trader suggests that the recent sugar high trend is similar to material fatigue. In other words, a phenomenon of progressive rupture after the market has gone through repeated cycles of tension or distortion (read low prices not always validated by fundamentals). On the other hand, a trading desk co-worker believes that the high trend was just caused by system buying, that is, robots, algorithms, and other non-humans.
Sugar delivery against the expiration of October’s contract early in the week was disappointing. The volume of 175,000 tons of sugar has been the smallest for a September since 2011. It has taken the weight off the market since a huge delivery smack in the middle of the Center-South harvest would be a strong signal that sugar has no destination.
The funds have covered around 58,000 lots in a week (according to the CFTC report published on Tuesdays), but are still holding a short position of about approximately 147,000 lots which they will eventually have to cover. The market went up 47 points over the period covered by the report.
Unfortunately, the macro scenario has deteriorated this week with the energy commodities falling by almost 6% (in the case of WTI and Brent oil) contrary to some softs, which have struggled hard to stay positive.
The sugar option activity in NY is intense. When this happens, along with a change in premium volatility, it shows that the market is concerned about an imminent change in price range. Therefore, we can see that a great volume of options has been made over the last days, concentrated between the exercise price of 11.00 and 15.00 cents per pound, which hold an open position of 136,700 lots between calls and puts.
More than 40,000 lots of puts are open on exercise prices between 11.00 and 12.00 cents per pound and almost 90,000 lots are open on calls of exercise price between 13.00 and 15.00 cents per pound. The options concentrate between 12.00 and 14.00 (111,000 lots between calls and puts) indicating the possible price range in which the market believes sugar will be at until the expiration of the March options, by mid-February next year (four months from now).
It’s best for the sugar industrial consumers to buy a call hedge financed by the sale of an out-of-the-money put, setting the maximum buying price which doesn’t significantly jeopardize the product margin, giving up the minimum buying price of the raw material, in case the market drops. Anyhow, we believe that above 14 cents per pound the market starts making room for India to offer its sugar for exporting, limiting eventual peaks beyond that level.
Of course some things need to be taken into consideration, notably the behavior of the oil on the foreign market (the inventories are high) which causes the drop in the commodity and the real depreciation against the dollar. These two factors can reduce the appetite of the mills to optimize ethanol production for next year.
We are still at the start of the last quarter of the year. A host of events is on the prowl to surprise us all: bullish, bearish, pessimistic, optimistic and constructive. We cannot let us be strung along by the daily oscillations caused by the buying and selling led by systems, robots and so on to fixate on the evolution of the fundamentals. We have a long way to go until March/2020 and, in our opinion, there are more elements, which can contribute to the change in price level to higher levels than the other way around.
The average gas price around the world, computed in late September, pointed to R$4.55 per liter (in Brazil it was R$4.37). The cheapest one was in Cuba (Venezuela is worth close to nothing) at R$0.37 and the most expensive one was in Hong Kong at R$9.46 per liter. The ANP (Oil National Agency) has published the month’s consumption volume in August: 4,562 billion liters of gas equivalent, almost 2% more than that of August last year. In the yearly accumulated, the consumption is at 39.46 billion liters of fuel, two billion liters above the same period last year.
The XXXIII Intensive Course on Futures, Options and Derivatives is set to be held in March/2020 – on March 24, 25 and 26 at the Hotel Wall Street on Rua Itapeva in São Paulo, SP. Don’t leave it to the last minute. Chances are the spots will have run out by the end of the year.
Have a nice weekend.
Arnaldo Luiz Corrêa
