With all due respect, it’s has been kind of hilarious to follow the headlines from the news agencies during this week trying to justify the reasons for the highs and lows featured by this disoriented sugar market over the past days. We have to understand that we are living in a moment of increasing volatility which causes speculative flows to move extremely fast. There’s money leaving one market and jumping onto another one with nobody having any idea why this is happening. The news must be reported and of course nobody expects a journalist to write a headline that reads ‘Sugar drops, but we have no idea what is happening.’ The show must go on.
This week the quotation of the sugar contract in NY closed out at 11.76 cents per pound for October/2020, unchanged against the previous Friday, but it traded as low as 11.27 cents per pound and as high as 12.27 cents per pound, that is, 100 points of fluctuation which made those who still work on pricing for the current crop dizzy.
The other maturities also experienced little fluctuation in the week. Although the number of traded futures contracts was weak, breaking the record of last Christmas’ week, it’s worth noting that at Friday’s session there were almost 3,000 lots of EFP (Exchange Futures for Physical) for May and July/2022. That is, 150 thousand tons of sugar got fixed between the buyer and the seller for the 2022/2023 crop. These are really different times.
The values in real per ton seen on the price curve for both 2021/2022 and 2022/2023 crops are still appealing. The average linear value (taking into account fixing 25% on each maturity) is R$1,460 and R$1,410 per ton, adjusted to present value by the SELIC fee. At least ¾ of the Brazilian mills get a great margin out of these price levels.
A point that might have future consequences has been calling my attention: the long funds at almost 72,000 contracts at a position which seems vulnerable to me. I will explain. The funds are usually long on an inverted market (where the asset futures price is lower than that of the spot price). The question is whether they are long in October or March.
Based on the open position of the sugar futures contracts, I’d dare say that most of it is positioned in October. In order to possibly roll over this long position in October to the next maturity (March), the funds will have to sell October 68 points cheaper (15 dollars per ton) than March repurchase, according to Friday’s closing. It’s a wrong-footed position. But, since I’m not a pythoness or use a crystal ball, there might be some strategy we’re missing.
That’s why we must follow the trajectory of the sugar prices in NY carefully because the funds might put a greater pressure on October (it’s still far away), which together with a possible worsening of the sanitary, political (Brazil and the United States with China) and economic (global) situation might occasionally come near 10.50-11.00 cents per pound in NY. This possibility exists. August and September will be two months when lots of our questions will be answered. There will be other questions after these…
The performance of the agricultural commodities in the monthly accumulated has been disappointing: cotton, coffee, orange juice, sugar fluctuated below 2% up or down. The grain market has been more oscillating but nothing overwhelming. The same goes for the energy market (gas, oil and natural gas). It seems to us the market is at a standstill. It’s waiting for something to happen or to have a sounder footing on the ground it’s stepping on. We are all standing on quicksand, so we’d better stand still.
The mainstream media still doesn’t talk much about CBIO (De-carbonization Credit). Many mills were worried about closing their certification processes to start the appropriate hires in order to regularize the coverage, bookkeeping, custody and negotiation themselves in B3 (former BM&F). Others are hiring banks accredited by the ANP to do the bookkeeping, custody and trade order execution with the B3; it’s worth remembering that the issuer (certified mill) will be able to have only one bookkeeping agent, whose contract can be shorter than a 12-month period. The accredited banks have several proposals to deliver these services. Some of them are quite similar. The mills’ choice will depend on how much the CBIO is worth. Nobody knows that, though.
Taking into consideration the countless messages we have gotten asking for information about the next Intensive Course on Futures, Options and Derivatives – Agricultural Commodities, we have drawn up the following release which can be seen on the following link: https://bit.ly/cursoarcher. Sorry, only in Portuguese.
Have a nice weekend everybody.
Arnaldo Luiz Corrêa
