The sugar futures contract in NY for May/2020 crumbled during the week and closed Friday at 13.02 cents per pound, an imposing melting of 102 points in five sessions or about US$22.50 per ton.
“My God, when will this ever stop?” a market trader asks. This kind of question usually comes from those who have missed the boat, have not fixed enough or have fallen in love with the position always expecting a little more. There are a few of them – that’s true. They are out there, though.
Based on the survey made by Archer Consulting, the mills have already fixed 78% of the estimated export sugar volume for the 2020/2021 harvest at the average price of 13.76 cents per pound, which represents a fixation equivalent to R$1,313 per FOB Santos ton. Never have we had a year where the mills – in such a disciplined way – have had an extraordinary volume of fixed sales even before they started crushing the first ton of sugarcane.
But there is still pushback that can be of internal nature as a trading manager, who was worried about the fixing volume imposed by the Executive Board, told me, and which limits the volume to be fixed before the crushing. Some further pushback, of conceptual nature, gets lost in the issue that has long been debated here about third-party sugarcane. The old dilemma about whether to fix or not third-party sugarcane keeps making victims. The market evaporates and neither the mill nor the sugarcane supplier takes advantage of good prices.
This scribe has for a long time supported that the mills should deal with pricing regardless of the sugarcane being their own or third-party’s. The shape of the price curve should be noted, that is, whether it is inverted or cash and carry. However, if prices are profitable, the contracts should be fixed and the part that corresponds to the cost of third-party sugarcane in sugar pricing can be protected by buying a call at the strike price in line with the break-even point of this “daring” anticipation.
What I mean is that a mill that uses 30% of third-party sugarcane and today doesn’t fix the corresponding part of sugar because it believes in natural hedge (wrong concept) should do it integrally and – to protect itself – buy about 20% of this volume (30% of third-party sugarcane times 65%, which is how much the sugarcane represents in the sugar cost) in buying options at the strike price above the market. By doing that, it maximizes its revenue. I saw this happen in 2016 when companies fixed sugar above R$1,700 per ton and bought purchase options at the strike price of 18 cents per pound, which turned into dust and paid a CONSECANA way below the fixed value. It takes a lot of creativity. Those who think they will stay in the business always doing the same things the same way had better think again.
Going back to the distressed trader’s question about when this fall will stop, note that the real won’t let it happen. The Brazilian currency devaluation provides the mills today with an average fixation of R$1,430 per FOB ton. Is there any question that the late mills will continue taking advantage of these prices? So, NY has room to fall and the funds, liquidating part of the long position (56,500 lots) will be important agents in this undertaking. Note, dear reader, that in order to go up, the funds have bought 220 thousand tons to make the market go up 1 dollar per ton. In order to detonate the market, the funds need to sell 93 thousand tons to bring down 1 dollar. That is, the market is much more vulnerable now.
The trajectory of the real against the dollar has raised some concern to the commercial and industrial areas of the mills. Living with a dollar at R$4.6700, which was the maximum rate that occurred during the week, makes the decision-makers revise the feasibility of changing the production mix in favor of sugar all the time. It hasn’t been easy to equate so many variables in a setting of such huge volatility.
Of course, the exchange rate can correct itself going back to more realistic values. It’s hard to understand why the real is the currency which has devalued the most against the dollar. There is something the most thorough analysts are missing.
Hydrous continues being competitive in this oil scenario, with steep price falls in the yearly accumulated; so, imagine what will happen when the dust settles and the energy market gets back to normal life. It was traded at R$2.5000 per liter on Friday, equivalent to sugar in NY with 75 points of premium. Changing the mix needs more exogenous factors.
What with so much uncertainty, bumps, volatility, coronavirus, and God knows what else, the feeling is that we all have an umbrella, one of those cheap ones bought at the exit of the subway station, to face a tropical cyclone. Lots of people will get soaked.
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
