The futures sugar market in NY closed out Friday with the first maturity – March/2021 now – at 13.58 cents per pound, just 7 points (or 1.50 dollar per ton) above last week’s closing.
However, the values converted into real per ton, had a greater appreciation due to the devaluation of the real in the week, which closed out at R$5.6832 – a 2.25% drop against the previous Friday. The price curve for the 2021/2022 harvest appreciated R$46 per ton on average, while for the 2022/2023 harvest, it appreciated R$30 per ton.
The ghost of the drought in the sugarcane fields is far from having been scared away. The scorching weather that has been hitting the producing areas of sugarcane in the Center-South lights up a red alert not only on the crushing of this harvest ending before it was expected, but also on the possible damage to the plant causing a delay in the start of the next harvest. If this really happens, we will see a strengthening of the March/May spread due to the smaller availability of the product at the start of the 2021/2022 harvest and, though it’s too early to say, a reduction in the total of sugarcane availability.
The beet harvest in Russia has also been affected by the drought, and Thailand will have a reduction in its sugar production. These factors, each playing a different role, might bring robustness onto prices. However, the market strength depends not only on these factors but also on the recovery of the global economy (see further on).
Delivery was under the spotlight over the week. Whenever the commodities market comes across a large physical delivery as what happened last Wednesday on the maturity of the futures contract of October, when 2.6 million sugar tons were delivered, the first question that comes to the traders’ minds is: is such a large physical sugar delivery bullish or bearish?
There’s plethora of narratives that justify both sides. Some say it’s bullish because the recipient has an immediate use for his product, which shows the market is pretty strengthened. Others say it’s bearish because conceptually the delivery is the last resource of the seller, that is, if there is no better available buyer on the market, the delivery turns out to be the most adequate (or the only one) alternative.
It’s worth observing, however, that on this delivery, the October/March spread traded at 62 points of discount on the average of the 100 sessions prior to the expiration of the futures contract. The volume increased substantially when this discount was trading above 70 points. If we take the average of the daily closing of the contract maturing in October over the period of 100 days of 11.93 cents per pound, we come to the conclusion that the October/March spread represented a carry of almost 13% per year. Then, the bearish label is jeopardized.
A carry of 13% per year shows that the buyer of the spread, that is, the trader who bought October and at the same time sold March, did so in order to receive sugar physically in October and eventually, but not necessarily, deliver the same volume in March next year at a higher price than the cost of carrying the product (financial cost, storage and insurance). This gain can be greater if the buyer takes longer to nominate the ship, because the mentioned costs will be smaller, and if the basis on the physical market presents some increase as well.
In short, despite a great physical delivery, it’s possible for the feeling of the market to be neutral or even positive, though the books say otherwise. The weak October/March spread set the tone, that is, the fact that October has been offered with a great discount against the March price made the end user come forward to (or maybe even) anticipate the acquisition of the raw material taking advantage of the discount.
The important thing about this movement is not to forget that the spread is the display on the futures market of the perception that the market participants identify on the physical market. And as far as that goes, the spread has done its duty satisfactorily. But what will outline the future of the sugar market depends on whether we will have a vigorous recovery of the global economy or face a new wave of Covid-19. Until we have a vaccine that can immunize the world population, this sword will stay stuck on a fine line over our heads. This macabre heads or tails will tell us whether we will have a world sugar deficit or surplus, which makes it difficult to speculate about the trajectory of prices. The funds continue accelerated and now are sitting on 200,000 contracts on an inverted market.
However, there’s one thing we cannot speculate on. Not fixing export sugar prices in real per ton for the NY maturities corresponding to the 2021/2022 and 2022/2023 harvests can turn out to be a wrong decision. Even if the mill is afraid prices can continue going up in real per ton, there is always the possibility of buying an out-of-the money call, whose exercise price is above the current market level.
Minister Guedes continues on his steadfast process of credibility loss before the financial market, switching his behavior from a bloodhound to a tamed little monkey meekly complying with his unbalanced master’s whims. Although he has set his mind on introducing a new CPMF tax, which would hardly be supported by the Congress in an election year, Guedes is now thinking about creating the CPMAgro, a tax on commodities exports.
The proliferation of the Minister’s far-fetched ideas has been causing a lot of insecurity to the investors and, by no coincidence, the real keeps devaluing while foreign investors fly to safer lands. Three months ago, Guedes had promised that “within 90 days at least 4 state-run companies will have been sold”. His promise runs out next week, but his shelf life as minister expired long ago.
The first (and only given that Trump has caught Covid-19) debate between Trump and Biden was a freak show or, as the commentator from the American CNN network put it, “a shit show”. Interruptions, teasing and insults which pretty much reflect the polarization we are also witnessing here in Brazil. It’s an idea desert, which is always very fertile for the populists such as Trump and Bolsonaro to pop up in. The world has really gotten too boring.
The thing is that October will be full of instability based on the internal scenario of usual uncertainties and on the foreign scenario with an eye on what might happen to Trump’s health. He has now proven that wearing a face mask lowers the chance of catching Covid-19.
It’s easier to be an air traffic controller in Indonesia than a sugar trader.
Archer Consulting is launching two courses totally online and live: the Essential Course on Futures in Agricultural Commodities, which will be held from November 23 to November 27 and destined for those who need essential knowledge about commodity market operation, and the Advanced Course on Options in Agricultural Commodities from November 30 to December 4. Both will be from 5:00 pm to 7:00 pm through Zoom® and taped for future review. For further information, email us at priscilla@archerconsulting.com.br
Have a great weekend.
Arnaldo Luiz Corrêa
