For those who navigate in the soft commodities universe, the so-called segment comprising sugar, coffee, cocoa, orange juice and cotton, it is crucial to keep the cardiology exams updated, because the emotions permeating this market are not for the weak hearts. Whoever was paying attention to the recent performance of the cocoa traded at the New York Exchange was surely surprised at the volatility and the sudden movements that have marked the scenario.
Hit by a reduction in production in Western Africa, responsible for almost two thirds of the world supply, cocoa found itself on a volatility roller-coaster. After breaking the 6,000-dollar mark per ton in early March, the commodity skyrocketed in value, almost doubling its price in 45 days, coming close to 12,000 dollars per ton, only to plummet to 7,000 dollars per ton in two weeks. The Exchange introduced the necessary mechanisms to stop any panic on the market; however, the volatility persisted, continuing to influence prices until the situation stabilized.
A similar thing happened to coffee. After two months trading within a narrow 180 to 190 cents per pound range during February and March, coffee increased by amazing 5,500 points, reaching 245 cents per pound in just 15 days, only to suffer a drop of more than 18% and close out the following week at 200 cents per pound.
Sugar did not lag behind, though it showed a little more stable performance compared to its pairs. After reaching 23 cents per pound in early April, despite the optimism of some trading companies that forecast a fast advancement towards 25 cents, sugar ended up dropping a little more than 16% from early April to this Friday’s closing, registering 19.32 cents per pound for July/2024, now the first trading month. This drop of almost 400 points in a month caused great concern for the mills that are still waiting on more favorable prices to fix the remaining percentage of their export sugar in the 2024/2025 crop.
The three mentioned commodities can be interconnected in the portfolio of the funds, which can have migrated from a winning position (like being long in cocoa, for instance) to cover new positions. In the case of sugar, as expected, the funds increased their shorts, as shown by the COT report. Based on last Tuesday’s position, the funds were short by a total of 48,407 lots, contributing to pushing the market downward even more.
Well, it seems like the gloomy predictions have come true. Remember when we mentioned that the worst scenario for the sugar futures market in NY would be exactly if the funds went short? It looks like our fears have come true. After all, the purchase of the industrial consumers cannot have the magic power to save the market when the funds decide to side with selling. And, to add a touch of irony, the huge delivery of 1.7 million tons of sugar on the expiration of May’s futures contract last Tuesday was just about a “show of horror” that did not help at all.
A sugar delivery can look kind of complex at first sight, especially for someone who is starting out on the market. Basically, sugar offers trading opportunities in spreads, which are differences between the prices of two futures contracts. For example, a trader can sell sugar on the current contract and buy on the next contract at a lower price, making a profit off of the difference between the two contracts.
This strategy can be profitable, but it also implies that the seller of the spread has to physically deliver the sugar on the current contract and repurchase it on the next contract. That is done to take financial advantages that the market offers upon carrying the sugar over to the next maturity.
However, when a large sugar delivery occurs, that might mean that there was no better buyer for the sugar at that moment. That reflects the weakness of the market, because it shows that there was not enough demand to absorb the available sugar, which can impact prices negatively. In short, it is an interesting game that calls for an intelligent balance between logistics and management of the trading book, but it can also be a sign of trouble when it occurs in large volumes.
Ah, the Sugar Dinner in New York! An event anticipated by many, where the participants get together to discuss the market’s future. Well, it looks like this year the mood will be somewhat different from the previous one. Last year, it felt like we were at one those situations where everybody was magically optimistic and any reference to the price fall was treated as a blasphemy. Speaking about a bear market was almost like committing a serious crime!
Now who knows? Will we have a mood change? After all, there is always the danger of turning bearish at the bottom. It seems like the lesson on uncontrolled optimism last year can be coming to light. Let us see how this week plays out. Will we have a new perspective or just more of the same?
It’s true that the perspective of the crop and crushing numbers is even better than what was estimated. Consensually, 605-610 million tons of sugarcane seems to set the tone. There will not be a sugar shortage. The mills are pretty fixed, which in a way kills any selling pressure that could compete with the sale of the funds. Any change in the fundamentals that might restrict sugar availability makes the short position of the funds as vulnerable as a house of cards on a windy day. If you were hoping for a calmer year in sugar, you’d better think again.
According to our analyst Marcelo Moreira, after the physical delivery of 1.7 million tons, the market continues trying to “discount price” to draw new buyers. July/2024 continues pressured with an important first support at 18.73 cents per pound. Losing this zone, the next relevant support is at 17.58 cents per pound. The next resistances are at 19.63/21.23/21.86 and 23.73 cents per pound.
Registrations for the in-person Advanced Course on Futures Options and Derivatives – Agricultural Commodities to be held in São Paulo on June 25 (Tuesday) and June 26 (Wednesday) are open. This will probably be the last opportunity this year for you to take a course that has become a reference on the market and has already been attended by more than 3,000 professionals. For further information, contact priscilla@archerconsulting.com.br.
Arnaldo Luiz Corrêa
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