The sugar futures market in NY was at 15 cents per pound, a level few believed to be possible less than six months ago. The funds greatly contributed to the powerful response of the prices which have the help from the increasing world deficit every day, with Thailand, which shows a smaller sugar production and Brazil, which shows vigorous growth in ethanol consumption, fed by good prospects for the economy.
The funds are long by 130,000 lots and can still be ready to buy more. How much more? This is a million-dollar question (or more). Their record is a long position of 218,000 lots. If they drive the position up to such level, considering the Herculean effort they made to move the market every dollar per ton (212 thousand tons of sugar for every dollar per ton of high) then, in a simple rule of three, the market would hit 16 cents per pound at most.
On Friday, NY closed at 14.92 cents per pound while the dollar exchange rate closed at R$4.3210, which drives the closing of the March/2020 futures contract to 1,481 real ton equivalent FOB Santos, the highest nominal value since the first week of February/2017.
I fear that at this moment some mills might start looking at the market insensibly and not take advantage of the good prices. “Oh, but don’t you think they can go further up?” “Yes, I do, but nobody goes bust with profit in the pocket”. Let’s face it, if a mill doesn’t make money out of R$1,481 per ton, it is on the wrong market. Are you afraid of pricing and that then the market might keep going up? Buy an out-of-the-money call at the exercise price a little above the parity value of ethanol, for instance. There are so many strategies. Talk to a risk manager as long as he isn’t the doctor and also the owner of the pharmacy where you will buy the medicine he has prescribed, if you know what I mean.
Right now, only two ghosts can scare the Brazilian producers: the real appreciating against the dollar and/or the oil price on the foreign market being under 50 dollars per barrel. If combined, gas consumer price plummets, hydrous loses competitiveness and mills look to sugar production. Since the real has reached historical nominal lows, we think these two points stand few chances, although we acknowledge that the black swans stuff themselves in these unlikely events. Translating into risk management, buying out-of-the-money puts for longer maturities is an interesting strategy if you have constant nightmares about black swans pecking your head.
ANP (National Petroleum Agency) has closed the consumption figures in Brazil in 2019: 60.7 billion liters total, the greatest consumption in history, divided into 22.5 billion of liters of hydrous, 10.3 billion liters of anhydrous and 27.9 billion liters of A gas. However, in equivalent gas, the consumption for 2019 closed at 53.95 billion liters, just 200 million below the greatest volume in history occurred in the twelve-month accumulated in June/2015. We have no doubt that 2020 will be a year of record consumption and, therefore, of good support for prices.
Archer Consulting has released its fourth estimate of the volume of pricing of the mills for the 2020/2021 crop. Almost 62% of the estimated volume for Brazil’s sugar export has already been settled. The average price reached was 56.25 cents per pound, the greatest since the 2017/2018 crop and second highest over the last six years. The average settling value is 1,292 real per FOB Santos ton, resulting from a settling in NY of 13.63 cents per pound and an average exchange rate of R$4,1210 hedged over the period.
Over the last 20 years, 85% of the times, the highest monthly average price reached by sugar occurred over the Oct/Nov/Dec/Jan/Feb period. It’s also worth noting that over the same 20-year-long period, only 40% of the times has the average price for February been greater than the average price seen in the previous month. However, our forecast model shows that the average price for February should be greater than that seen last January: 14.51 cents per pound against 14.16 in January.
Market Tales: many years ago, at the start of a rainy April, a well-known trading company was going through a cash flow squeeze due to the increase in the price of commodities and of the margin call in the operations with futures it had with brokerage houses and which totally drained its liquidity. The financial director of the company, eager to get an additional credit line from the financial market, sent his manager to a decisive and important meeting with a bank at a time where there was no cell phone. When the meeting was over, the manager needed to call the director to let him know whether the negotiation had gone well. “Good morning, sir”, the manager said enthusiastically. “Shoot, boy, how did it go?” “Boss, we got five million dollars”. “Hurray! That’s great. Nice job. You’re amazing. Congratulations”, the boss said, unable to contain his enthusiasm, which disappears when the manager interrupts him on the other side of the line, “I’m just kidding. Today is April Fool’s Day”. Beside himself, the director came out with a dozen of unprintable words and hung up on the cheeky manager. Then he ran to the Chief Executive’s room calling for the insane employee’s head. He was duly fired as soon as he came back to the office.
Have you already secured your spot for the XXXIII Intensive Course on Futures, Options, and Derivatives? Don’t waste time. The course will be on March 24, 25 and 26 at the Hotel Wall Street on Rua Itapeva in São Paulo, SP. Join more than 1,000 professionals who have already taken and enjoyed it.
A nice weekend and a great trip for those heading to Dubai for the Sugar Conference which will take place this Sunday.
Arnaldo Luiz Corrêa
