The sugar futures contract in NY closed out Friday suffering an accumulated 7-dollar-per-ton decline over the week for the first maturity in March/21, quoted at 14.36 cents per pound against 14.72 cents per ton last Friday. For the maturities of the 2021/2022 crop, the average decline has been 12 dollars per ton over the week and for the following period, that is, the 2022/2023 crop, the decline has been greater: 16 dollars per ton.
In order to make up for last week’s decline, the real has depreciated against the American currency by 1%, closing out Friday at R$5.7429 after having reached the peak of R$5.8087. Because of that, the future dollar curve, for those who opted for NDF (Non-Deliverable Forward), showed great values in real per ton for all long-term sugars. This might be one of the reasons why the NY quotation had such a sharp fall in longer maturities. Price improvement this week has been R$17.00 per ton on average.
New concerns over a second wave of the coronavirus and the impact it can have on the global economy have arisen again. As we have commented here several times, the size of the deficit in world sugar and fuel consumptions caused by the pandemic seems uncertain. It’s hard to stay positive in terms of prices under this scenario of uncertainty. The recent and vigorous sugar price hike has always puzzled us.
Europe and the United States will strengthen sanitary measures in order to prevent the virus spread. Experts who believe in science (not those who abound on social networks every day coming from who knows where) admit that the vaccine might be available in 2021, but they don’t rule out the 2022 first quarter. That’d be a disaster.
However, there are two elements that we know have unquestionably been giving support to the sugar market. For starters, the funds which have substantially increased their positions to more than 262,000 long contracts, causing intense bullish pressure. (It’s more than 13 million tons of sugar which they will eventually have to sell). Not only did the funds position themselves in the “naked” purchase of futures contracts, but they also increased the pressure on March/2021 with the March/May spread purchase.
The position of the funds couldn’t be more comfortable because, although we still have more than 100 days ahead of us before the March/21 futures contract expires, the market reversal favors the roll-over of the long position from March to May since by doing that the fund will be selling March at a higher price than the new purchase in May, creating realized profit in their portfolio.
Secondly, the rumors (mind you…rumors) that a trading company would also be aggressively buying the March/May spread to benefit its sugar position in the physical in a possible (re)delivery on the next maturity help with the strategy of the funds even further.
Hypothetically, the trading company could, say, have started the purchase of the March/March at 50-70 points and when it reached 80-100 points, it sold twice as much. So, the net result of the strategy represents selling the spread at 120 points. In short, it delivers the sugar in March and gets it back in May at an annualized discount of 35-39% per year. Not bad.
Our readers know that we are speculating and trying to understand the image which is shaping up based on the information that we’re getting. It seems crystal clear to us that speculators are leading the market to artificial levels while the fundamentals, which should provide support to the narrative of the funds, weaken as the risk assets show a strong negative slant due to the pandemic.
A component which has caused unbalance to the market is the delay in the release of the Indian subsidy. It’s believed that the subsidy will come through; it might be lower than the value given last year (about 140 dollars per ton) due to the huge fiscal deficit India is facing. Nothing will be released or presented before the end of the Indian state elections taking place in mid-November. It’s also hoped that the minimum sugar price of R$33,000 per ton (which is about 442 dollars per ton) will pass.
If there is no subsidy, no minimum price will hold out and what will happen first is that the mills will be forced to sell their sugars below the minimum price, which is already happening right now. The feeling is that without subsidy, a situation few believe can occur, we would see a collapse in domestic sugar price in India and NY would have to reach a point where it would draw India onto the foreign market and keep the balance with the domestic market – taking into account that the production cost of sugar in that country should be around 19 cents per pound. It has to make a deal with the Covid-19 virus.
To make things clear, the minimum price in India today is R$31,000 (which could reach R$33,000) or close to 19 cents per pound. It’s obvious this price has to collapse without subsidy for the export, because 5-6 million tons of sugar will put huge pressure on the domestic market. The million-dollar question is how will the world sugar market respond if 5-6 million tons of sugar is wiped off of it? And what would the break-even price in NY be without the guarantee of domestic minimum price in India? It also has to make a deal with the Covid-19 virus.
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It’s easier to figure out who the murderer is on the first pages of the most fascinating book by Agatha Christie, “The Murder of Roger Ackroyd” than to know what will really happen in India. A great read for the quarantine.
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Registrations for the two courses launched by Archer Consulting, totally online and live/pre-taped, are already open. One of them is the Essential Course on Futures in Agricultural Commodities and the other is the Advanced Course on Options in Agricultural Commodities. Don’t miss out on this opportunity. The next courses will only be in March/20221. For further information, email us at priscilla@archerconsulting.com.br
Have a great weekend everybody.
Arnaldo Luiz Corrêa
