The sugar week was shortened by the holiday in the United States last Monday and brings forward the possible volume fall which will occur because of Carnival in Brazil, which starts this Friday and will go on until Wednesday noon when office hours at most companies resumes. People usually say that in Brazil the year really starts after Carnival. Let’s see how this will actually affect sugar.
We have never actually had a pricing volume as extraordinary as this one nor have the mills gotten ahead of pricing as aggressively as we are witnessing. There are lots of mills, for example, that are fixed by 100% of the volume committed to sugar export for the 2020/2021 crop and whose sugarcane hasn’t even been crushed. And, without any fear, I believe they have done what was right. We can’t afford to throw away a sugar pricing at the current levels in real per ton for this year. What’s more, as we said here on the last comment, the dollar has valued beyond what we could suppose and this has been helping the mills decide on fixing prices. Oil is in a slump. Imagine if we were above 60 dollars per barrel on WTI to top it off – but we’re not there yet.
According to energy specialist in NY, Patricia Hemsworth, “because of Libya, OPEC will likely reduce the production by a million barrels per day due to the resumption of the combats in the seemingly endless civil war. China is buying a great volume of crude oil taking advantage of what seems to be the bottom. This will take a toll on the market down the road. Prices will only bounce back when China starts getting back on track, when the coronavirus phase is over”. That is, price recovery might happen but at a moderate speed.
The substantial reduction in sugar availability by Thailand has already reflected on prices. The Center-South is still a mystery for the world market. The bets on sugar mix increase run from 37.5 to 50%, which shows that nobody has the slightest idea what the mills are thinking. They rightly buy the price curves of ethanol through the year, taking into account the valued exchange rate with the sugar curves. Other questions are hard to monetize and depend on logistics, cash flow, storage and tanking availability, and already signed commercial contracts – the decision is not always about the best value.
The funds have increased the long position by about 10,000 contracts driving up the total position to 159,000 while the mills keep hedging sugar in NY on an upward scale. As the volatility of the options are reasonably palatable, pricing in real per ton and buying out-of-the-money calls to participate in a possible continuation of the bullish trend is a smart strategy.
I say this because, as it has already happened in other situations where the prices on the NY screen were pretty profitable, the mills fear the market will keep going up after the pricing. It’s possible, of course. Nobody has a crystal ball to know what the peak of the market will be. However, it’s good to watch for the signs.
For example, Al Khaleei Sugar Dubai Refinery (AKS) delivered more than 300,000 tons of white sugar against the expiration of the white contract of London. As the premium reached more than 100 dollars per ton, availability arose. High prices are usually an excellent cure for high prices. And this premium level (100 dollars per ton on raw sugar) surely brings huge profitability to AKS. It encourages the purchase of raw sugar for refining, taking advantage of the excellent premiums, but, as a rule, narrows the white premium.
Next week, March will expire, which might bring more elements to the consolidation of the price trajectory. The last deliveries brought little volatility to the market. NY needs exogenous events of high magnitude so that it finds room for more than 15 cents per pound for the next maturity, which is May. In the short term, these events could be a meaningful reduction in the Indian harvest or an extraordinary increase in oil international price, but they’re not all. Neither of them seems to have reasonable profitability right now.
Even if there is uncontrollable optimism toward sugar, we cannot ignore the impact that the coronavirus has on commodities, currencies of the emerging countries, consumption of energy ingeneral and possible reduction in the world economic growth.
It’s better to keep the feet on the ground.
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Happy carnival!
Arnaldo Luiz Corrêa
