A LITTLE BIT MORE OF THE SAME, BUT WANTING TO BE DIFFERENT
The contemptible performance of the sugar futures market, closing Friday’s session with March/2020 hitting 12.41 cents per pound and accumulating a loss of almost 5% in the week, strengthens the idea spread by nine out of ten traders that the sugar market is still restricted to a boring price range between 12 and 13 cents per pound. That is, buying at 12 and selling at 13 looks like a small-risk strategy; however, there is more behind this feeling.
Last week the energy market was deteriorating with some of the commodities, such as Brent and WTI oil, falling by more than 6%. Last Friday, the computer screen was dyed with green with almost all market quotations operating within positive territory. Guess, dear readers, which were the only markets working in the red? A strawberry lollipop for whoever said sugar and coffee. Would it be the funds selling softs and buying energy again?
Well, our take on this is that the movement of the markets is following the same old algorithm rule and mathematical models. Damn the fundamentals, since they haven’t shown their teeth and claws yet. So, a long-short operation, even if it is short-term, justifies the movement of the funds. That is, they sell sugar and buy energy since it has fallen way too much over the last weeks and the risk of staying short in sugar isn’t that big a deal.
It’s important to say that the funds that pressure the futures sugar market today are the same ones that three years ago put the NY contract close to 24 cents per pound and nobody questioned them about that. They were wrong then, just like they are wrong now, in our opinion, but time will take care of correcting the fundamentals.
But it cannot just be a movement of the funds, can it? Well, five days ago both coffee (falling by 5.8%) and sugar (falling by 2.8%) were at the reverse end of RBOB gas, WTI and Brent oil, which went up by more than 3.5%. The funds increased their short positions by almost 20,000 lots in sugar this week. According to the report published by CFTC, they are short 170,000 lots. Draw your own conclusions.
Of course what makes it hard for the sugar market to make a more consistent recovery is exactly the fact that some mills can fix their export commitments but they don’t want to, or cannot or shouldn’t wait for better prices so they will not jeopardize their fiscal year or their budget.
Another encouraging fact, in this case, is the recent combination of the oil drop along with the Brazilian Real appreciation. Cheaper gas in real reduces the favorable arbitrage ethanol has against sugar and can affect the production mix in the Center-South for next year.
Vessel appointments to load sugar at the Center-South ports continue to increase, a good sign that there is demand for the product.
China and the United States partially close a trade deal which should bring some quiet for the bustling market of commodities. On one hand, the United States reduces some fees on Chinese products; on the other hand, the Chinese make some concessions in the agricultural area -that’s good for the commodities.
We still have a lot of time to go before March expires – about 20 weeks when anything can happen. There are still questions about the Indian harvest, the closing of the Center-South harvest, the consumption level of ethanol – which can reduce the passing stock and keep the mix for next year, climate effect on the European harvest, harvest reduction in Thailand beyond what we were expecting, among many other exogenous factors.
The end of February is 20 weeks away. I hope they are different from the last 20 weeks because the market has varied very little over them – from 10.68 to 12.93 cents per pound. Let’s see how things will play out.
