The sugar market in NY closed out Friday with March/2021, whose options expire next week, at 16.46 cents per pound. The performance of the sugar in the yearly accumulated is encouraging. It had a positive variation of 6% against the end of 2020 and – it’s important to point out – with a little help from the robots and algorithms that boosted the quotations way beyond what the fundamentals can imagine.
The total number of open options for March, which expire next Friday, with strike price between 15.50 and 16.50 for both calls and puts is almost 40,000 contracts and can bring volatility to this market thirsty for thrills.
The expiration of March futures contract is coming up and the market is speculating that there might be a physical delivery of 2 million tons of sugar. Hopefully, the receiver will have a fast destiny for this mountain of sugar, since the next contract at the NY exchange (May/2021) is suffering a discount of 16 dollars per ton.
The downward sugar price curve in NY for maturities under negotiation points to a decline close to 10% per year. Take March/2021 at 16.46 cents per pound and July/2023 at 13.02 cents per pound. What does that mean?
Firstly, the owners of physical sugar (producers, trading companies) should get rid of their stocks right away since they depreciate over time. Secondly, refineries and industrial consumers should delay buying raw material as long as possible, because the later they buy it, the cheaper the product will be. The market, therefore, doesn’t encourage carrying stock.
The statement above can be found in books on commodities, but some factors are worth mulling over. The market might be facing a steeper curve, that is, shorter maturity with higher prices than those of longer maturity, just because those who could get rid of their stocks, as mentioned above, have already fixed great part of their product, which makes it difficult to soften the curve. The effect of the algorithms and robots pushing prices up artificially intensifies the pressure, but how about the fundamentals?
In our opinion, the fundamentals are already too much reflected in the prices. The mills have already fixed almost to the limit of their own sugarcane. Some don’t fix the sugarcane of third parties only, believing in the fallacy of natural hedging, but this is a subject matter to be talked about some other time.
This year we will have another crop which will maximize sugar production in the Center-South again, but because of the expectation of a lower ATR, it will produce 3-4 million tons less sugar in comparison to the 2021/2021 crop. However, Brazil has been overloading the world with sugar by exporting 11 million tons more over the last twelve months compared to the same previous period. Thailand has used its stocks. There is stock left over in India, whose minimum price is a sophism and 15 cents per pound is an interesting price to export at, though it has come up against logistics issues.
How much sugar the world needs, much as the narrative of the bullish points to 16-17 cents per pound, depends mostly on the recovery of the global economy and the vaccine to put a stop to the pandemic caused by Covid-19. Regardless of the consumption, prices in real per ton for the Brazilian mills continue way above their most optimistic perspectives. 2020, despite the pandemic, saw amazing prices to pay off debts, to strengthen cash flow and distribute dividends.
We still don’t know the numbers of world sugar consumption. I’m more skeptic than most analysts. If the consumption had been growing by mere 0.46% per year over the last five years before the pandemic, how do you think it’s doing now? We don’t believe in shortage of sugar; the inverted curve is supported by profiteers on shorter maturities (pushing the curve upward) and the massive fixation of prices by producers over longer months (pushing the curve downward) making the curve more oblique.
The best of all the worlds for the mills has been the pricing in real per ton combined with a purchase of a call 200 points above the market, that way participating in a possible dramatic price rise. Those who have been following this recipe are smiling broadly.
Nobody can predict exogenous factors of great impact, so buying and selling hedges are welcome when put together – if possible – with the purchase of tail insurance (those that are at the extremes of the normal distribution and that we have started fondly calling black swan). 2021 will be an interesting year.
What we can notice is a recovery of the hydrous price. The average discount we identified on Friday’s closing looking at oil, dollar and ethanol in B3 (former BM&f) points from 350 to 450 points compared to NY. Due to the expected GDP growth and the delta on it in gas consumption (Otto cycle), it will be no wonder if this discount drops to 150 to 200 points over the year. In short, there is a great chance hydrous will trade at more profitable prices for the mills supported by the GDP growth, improvement of the energy market abroad (oil and RBOB have already gone up by more than 15% this year) and reduction in availability of hydrous production this year in the Center-South by about 1.1 billion liters.
Time flies. The weekly comment about the sugar market that comes to you every weekend is now coming up on its 15th anniversary. We continually try to make the complex trading dialect easier so that more and more people understand how the market works. Demystifying the use of available financial tools to the sugar market participants has been our permanent focus here and the same goes for the almost 40 courses on derivatives we have given over these years reaching more than 2,000 professionals in the various agricultural, mineral and metal commodities. It’s a great honor for Archer Consulting to be able to spread knowledge and contribute, even if modestly, to the growth of our agribusiness.
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Have a great weekend everybody.
Arnaldo Luiz Corrêa
