The number of futures contracts traded on the sugar market in NY reached a daily record last Wednesday when more than 516,000 lots were traded, breaking the previous record of 410 thousand contracts in January/2008 when the Brazilian trading company Fluxo was forced to liquidate its positions by the NY exchange. The OI reached more than 1.24 million contracts, strengthened by the appetite of the funds, which now are long by a little more than 149,000 contracts, and of the commercials (trading companies and mills), which fostered export pricings for the 2020/2021 crop.
March/20 hit 15.90 cents per pound and then plummeted to the 14.89-cents-per-pound low seen this Friday. The market ended up closing the week at 15.06 cents per pound, in an accumulated appreciation of 14 points in the week (a little more than three dollars per ton). Sugar value in NY closed the week at the equivalent of R$1,488 per ton.
February already presents a very good volume, showing that more mills must be speeding up the price-fixing not only for 2020/2021 but also for the next crop. Since Archer Consulting started monitoring the price-fixing of the mills, we have never had such a huge volume before the crop starts. The mills are more disciplined and have learned the lessons of the past.
We have vehemently advocated that the mills keep fixing sugar export prices taking into account some pretty favorable points in the current scenario which might not be available over the next weeks. The real, for example, has devalued rapidly against the dollar, contaminated by the spread of the coronavirus which lights up the alert to a shrinking of the world economy and the increase in risk aversion. For the mills, however, this is the opportunity to lock in the exchange.
The sugar curve in NY converted into real per ton shows excellent revenue for the product. The dollar, which on Friday closed at 4.3010 real, is overvalued. This feeling that the American currency is too stressed can be witnessed when the Focus bulletin, which reflects the expectations of the financial market for the Brazilian currency, shows a R$ 4.1000 rate for the end of the year, for example.
If the American currency returns to the estimated threshold, the mills will need sugar in NY to exceed 16 cents per pound to provide the same profitability in real per ton. A risky bet, because the fundamentals right now do not corroborate this.
The sugar market today is pretty different from the market some years ago. A total paradigm change occurred during Pedro Parente’s term as president of Petrobras from 2016 to 2018, which changed the mechanism of gas price formation for the domestic market and started taking the international price into consideration and making the commercial area of the mills be more wary of the arbitrage between hydrous and sugar.
Another paradigm change is the fact that the financial market can nowadays offer mechanisms of protection which make it possible for the companies to choose the hedge that best fits their reality and their risk appetite, which can be choosing between hedging sugar or ethanol all through the existence of the structure. Gas pricing transparency has made way for the rise of better-structured operations, which demand a little more knowledge of derivatives in addition to the basics.
Buying oil puts in real as part of the cross hedge to protect ethanol from a possible fall is just an example of the creativity of the better-informed traders. The upside of this whole change the market has gone through recently is that with two products with prices set by the international market, the possibility of structures of protection, even if it uses cross hedge, has been a switch on how risk management had been performing in the sector.
In an unprecedented situation, today the sector can – if it sees that prices of the products it produces are lucrative – come in 100% fixed and/or protected in a crop whose sugarcane has not been crushed yet. This is healthy. The sector goes into a period that can bring good results, with a good margin, with better management, with a professional attitude towards treating risks.
Selling futures and buying an out-of-the-money call solves the dilemma of those who still look at the screen dreaming about higher prices. It’s better to guarantee the sale price now and give up a small piece of it spending on insurance than to look like someone who has lost at the poker table for a pair of twos.
The next crop will be more sugar-producing, much more due to the mills taking advantage of high prices and strong dollar than having deliberately decided on this. A great part will just become the mix just because it settled good prices in NY.
The legitimate concern of some traders is that above 15 cents per pound the world will keep producing a lot of sugar and, therefore, will flood the international market. Those who get ahead on this issue are smart. However, it’s good to remember that oil has depressed prices. Under this scenario, if oil goes up and the real continues weak, things might get pretty interesting.
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.
Have a nice weekend.
Arnaldo Luiz Corrêa
