Since mid-July, the non-indexed funds (speculative) have gone from a position of 71,500 long contracts in sugar in NY to 179,250 contracts, according to the number released today by the CFTC (Commodity Futures Trading Commission), an independent agency of the United States government that regulates the futures markets and options of the commodities. Over the same period, the sugar market fluctuated from 11.27 to 13.28 cents per pound.
Broadly speaking, since then the funds have added 107,750 lots to their long position while the market has varied 201 points (44 dollars per ton). That means that in order to move 10 points in NY (0.10 cents per pound) the funds need to buy the equivalent to 272,000 tons. That’s a Herculean effort.
The mills continue taking advantage of the good prices in real per ton and speed up the fixations for both the 2021/2022 and 2022/2023 harvests, depending, of course, on the available cash flow and credit line to achieve this strategy. The exchange correlation with the sugar contract in NY has been 0.75-0.80 in the last twenty days, a sign that the devaluation of the Brazilian currency strongly affects the NY quotation.
The weak numbers of the PMI (Purchasing Managers Index) of Europe, an index that collects accurate data about the health of the European economy, are lower than what the market expected. We have mentioned here that August and September are the months that will provide more accurate data for the analysis of the shortfall in world consumption. And when the data arrives, it only proves our fear.
So, the commodities felt the blow on Friday and operated on negative territory. In the monthly accumulated, however, most of them moved sideways, without great highlights. Sugar dropped between 4.00 and 9.50 dollars per ton in the week, repeating the same model of the previous weeks, that is, the farther the maturity is, the greater the fall in cents per pound is. That happens due to the dollar curve via NDF (Non-Deliverable Forward), a currency contract in terms of cash settlement, which raises the quotations in real per ton over time and attracts more sellers.
October/2020 closed out at 12.83 cents per pound (a 6.60-dollar drop per ton in the week), but the real devalued by 3.64% against last week, closing out at R$5.6193. So, the sugar average value in the week went up R$26 per ton for the 2020/2021 harvest, R$31 per ton for the 2021/2022 harvest and just R$5 per ton for the following harvest.
As long as the funds have enough breath to keep pushing the market upward, we will continue seeing this positive flow for the mills, which will continue taking advantage of it. A reader of our column warned that the record position purchased by the funds occurred in late September/2016 when the number of contracts reached 346,000 lots, which then represented 40% of the open position while at the same time the prices in NY were about 22 cents per pound and the adjusted value (by IGPM) was equivalent to R$2,222 per ton.
To hypothetically reach the same value, taking into account the abovementioned dollar quotation at the closing on Friday, NY would need to go up 435 points. Another exercise we can do is to suppose the funds aimed to have a long position worth the same 40% of the open position. Today, the open position in NY is at about 1,030,000 contracts, that is, to get to 40% of it, the funds would need to purchase another 232,750 lots – a pretty large volume.
If we just chose the nominal record, we would see an additional purchase of 166,750 contracts. In a simple rule of three, projecting that the funds would use the same effort they recently had, this would theoretically result in NY going up to 21.50 cents per pound in the first hypothesis and 19.00 in the second. That’s pure conjecture.
For the time being, the domestic economic setting seems to ignore the rupture risk and the worsening of the political crisis that should hit us next year since Jair Bolsonaro is in the midst of the campaign without having taken over the presidency. In order to be reelected and protect his children, the president will meet the demands of the “Big Center” and this bill will be paid by the whole society. It’s hard to be optimistic.
Brazilian sugar exports accumulated in the year (January to July) come to 14.6 million tons, 55% more than that of the same period last year. The 2020/2021 harvest (April to July) amounts to 10.33 million tons of sugar against 6.1 million tons over the same period the previous year. Over 12 months, the export total of 23.2 million tons of sugar is 21.7% higher than that of the same period last year. Ethanol exports at 2.2 billion liters over the last twelve months represent an increase of 21% against the previous period. Will we break the export record of 29,775,000 over a period of twelve consecutive months?
Strong market rumors have it that a large company in the sector deep in debt was able to renegotiate its debts with the financial sector and got a substantial reduction (haircut) of 50% on the debts. So, it’s negotiating its buyout by another large company which is about to close on it.
There are a few spots for the registrations for the online and live 34th Intensive Course on Futures, Options and Derivatives – Agricultural Commodities. Even though it’s online, we have set a limited number of spots so that everybody can get the most out of it. Classes will be held in the first two weeks of September. Click on https://youtu.be/YyoR2BcpyI8 for further information.
Have a nice weekend everybody.
Arnaldo Luiz Corrêa
