It took 427 lots for the sugar futures market in NY to move one point up when the non-index funds undertook the last great addition of purchased volume a couple of weeks ago. Last week, according to the data released by the CFTC, the funds purchased another 16,857 lots and moved the market by 98 points. This time around, in order to move one point up they only needed 172 lots.
Short of 40% of volume the funds were able to have an impact on the market. This clearly shows that the recent increases have little or no relation to the climate issues that affect great part of the sugarcane fields in the Center-South, that is, as we discussed here last week, the market goes up because few sellers stepped forward to provide liquidity to the appetite of the funds. And, of course, if the sellers don’t step forward, it is because they cannot sell more as their sugars are already fixed to the fullest. It’s clear that this procedure on the part of the funds might continue while there is enough money in their pockets. However, I would like to point out an aspect I find important.
A scare during the week caused by the startling American inflation rate was enough for the market to melt very quickly. That’s where the danger lies. Exogenous events trigger massive liquidation of the long positions on the part of the funds that suggest an extremely vulnerable market.
Actually, we have weaknesses on both sides. The market might keep going up due to the funds as long as they have one bullet in the chamber and can be helped if the margin calls bother the cash-flow of the shorts (mainly trading companies). Compared to last week, based on our calculations, at least US$250 million in margins must have been returned. The market can also fall if this macro scenario deteriorates. Note that regardless of the direction, our feeling is that there will be great and fast movement. The books teach us that the fundamentals always prevail. We should be careful.
For the umpteenth time, I have to mention the spreads. The curve declines further on the short term than on the long term, objecting to the shortage of sugar due to the drought narrative. The sugar futures contract in NY for July/2021 closed out Friday at 16.96 cents per pound, a 51-point drop over the week (a little more than 11 dollars per ton). All the other following maturities also closed down, but smaller than the maturity that comes before it. The pressure of the curve is on the short term, paradoxical to the so talked-about effect of the water deficit on the sugar availability.
I won’t be delighted if time says that our analysis is correct. I do have a lot of curiosity to understand the different aspects that affect the market and the decision-making process motivated by them.
The sharp NY downturn has had little effect on the hydrous price, which broke new records, having traded at R$3.7000 per liter. This is similar to 30 points above the NY closing, seductive enough for some mills that belong to the last quartile of the financial weakness to eventually be able to suggest putting off the imminent sugar delivery until next year or the twelfth of never.
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Brazilian sugar exports have reached the record figure of 32.1 million tons (which made me lose a bet for dinner and wine). This means that in the 2020/2021 crop, Brazil dumped 13.1 million tons of sugar on the foreign market, an amazing increase of 69% against the same period last year. This volume eventually lessened the concern over deficit once it compensated for the smaller availability of other producers.
Ethanol exports have also done pretty well, reaching 2.88 billion liters, a volume 53.8% higher than the previous year.
It’s always worth remembering that from 2010 up to now, adjusting all the values by the IPCA, in less than 20% of the times, the market has traded above R$2,000 per FOB equivalent ton.
You all have a nice weekend.
