The havoc wreaked by the coronavirus on the world economy has not been captured by the radar of the most pessimistic market operators. The global spread of the virus and the uncertainties about it have caused a bloodbath on the risk assets, which this week sailed on a red sea induced by the market quotations which have violently melted in just a week.
The energy market, for example, witnessed WTI and Brent oil plummet by close to 16% in the week – the greatest fall in a week since the 2008 crisis. RBOB gas has shrunk by 10% in the week, while natural gas and heating oil have also experienced huge losses.
All these two weeks after this scribe stated here that this would be a year of good results. Well, of course this assertion isn’t necessarily discarded. Most mills we have commercial relations with already anticipated sugar pricing when NY was orbiting 15 cents per pound and, often, some are totally fixed for 2020/2021, with a good share fixed for the following harvest. It’s worth remembering that although the market has fallen by almost 100 points, the value of sugar in NY is more than R$1,450 per ton FOB Santos.
Two weeks ago, here we talked about buying oil puts to protect a possible ethanol fall and we also emphatically advocated that mills should speed up sugar fixations for export. If your company did its homework, you can’t stop laughing. If not, at least the current moment can be an opportunity to buy out-of-the-money calls for longer maturity.
A bull market seems to anesthetize the decision maker. The more the market goes up, the more haunting the difficulty in pricing seems to be. There is a fear of selling and of the market going up then. How many times have we seen this movie before? And the good guy always dies at the end. We recently talked about the possibility of a black swan, that is, that unlikely event that overwhelmingly wipes out everything on its way when it comes along. Well, this time around the black swan has come in the shape of a virus.
Past experience shows that the markets usually overreact in highs and lows. The panic spread by the virus drives away the investors who aren’t cold-blooded enough and the market melts fast and uncontrollably. That’s what happened to the stock market and the commodities market in general. Now everybody looks back and misses the good prices. That’s what will happen to the sugar market. We have quickly gone from the “Wow, awesome” phase to the “Oh my God” phase.
What the coronavirus will do to the sugar in NY will be felt through the next chapters. The way the oil market has plummeted will affect the profitability of ethanol and, therefore, increase sugar production. If I were to bet on a number right now, it would be 42% of mix for sugar. The 2019/2020 crop had a mix (up until February 16) of 34.47% of sugar. We are saying that the Center-South might produce an additional 6.2 million tons of sugar. Each percentage point of mix change favorable to sugar represents about 750-800 thousand tons available on the market.
It was a doubly strong blow particularly for the sugar market. The oil price plummeting on the international market opens up the perspective of Petrobras lowering gas price at the refineries and, therefore, impacting the arbitrage relationship with hydrous. On Friday, the state-run company announced a R$0.0700 cut per liter at the refinery; other cuts should be on their way.
Sugar in NY closed Friday with May/20 (now the current month) at 14.20 cents per pound, a 92-point fall in the week, or more than 20 dollars per ton, something like R$90 per ton lower. With the expiration of the March futures contract this Friday, 950,000 tons of sugar was physically delivered. I don’t see any impact on the market with regard to this volume of delivery and once again it looked neutral to me. However, rumors had it that the NY Exchange would have determined early in the week that an important market player reduce his position in the March contract, which would have caused the melting of the March/May spread. Those were just rumors.
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It’s with great regret that I announce the passing of Professor Dr. Oscar Frick last February 23. We worked together when I was Agriculture Director at BM&F in 1999-2000 and he was developing agribusiness derivative products. He was a active professional in agribusiness, having given several lectures in Brazil and abroad and written numerous brilliant articles. In one of them, about the birth of CPR, he was praised by Delfim Neto, and given the repercussion it got boosted the morale of the Exchange. He had a Cartesian logic and refined sense of humor. May he rest in peace.
There are still a few spots for the XXXIII Intensive Course on Futures, Options and Derivatives which will be held on March 24, 25 and 26 at the Hotel Wall Street, on Rua Itapeva, in São Paulo, SP. This could be your last opportunity to join more than 1,800 professionals who have already taken and enjoyed it!
Have a nice weekend.
Arnaldo Luiz Corrêa
