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The weight of the rollover of the mills, which we talked about here last week, was greater than what we expected. We said there was still room for October (which had closed at 13.98 cents per pound) to fall even further, to maybe about 13.50. The market was more pressured than that and knocked down the prices to 13.01 cents per pound. Well, the average of the daily closing prices of the sugar at the exchange in NY in September was 13.93 cents per pound vis-à-vis the forecast of the Archer model of 14.01 cents per pound, that is, our model was off by 0.56%.

On the day of the maximum fall, that is, on Wednesday, there were strong rumors going around on the market about the OTC operations whose levels of deactivation were reached (the famous and renowned knock-out). In these operations, the level of hired protection at the time set out that if the market fell and reached a certain pre-set price, all the hedge structure would disappear. Therefore, some companies might have been caught in this mousetrap and had to substitute them by selling the market for their hedges that disappeared suddenly. So that people won’t unfairly say, as a colleague called me out on, at a recent event, saying that I’m an enemy of OTC operations, see if this type of operation works a hedging. It obviously does not. 

The widening of October/March spread is a reflection of this rollover, which suffered the unsuccessful repurchases of the hedge, the procrastination on the part of the mills and the disinterest of the physical market. The maturity of futures sugar contract in NY showed at the end a delivery of more than a million tons of Brazilian sugar through the ports of Santos, Paranaguá, and Maceió. There is no surprise that will reflect on a greater fall next week, although bulky deliveries such as this occur when the physical market is uninteresting enough to make the deliverer use the exchange as a last resource. 

The funds increased their short positions. When the fundamentals are weak, the risk of increasing the exposure pays off. Now they are almost 90,000 contracts short. On the other hand, the mills have the limit of almost five months to rethink their fixation strategies. They rely on the time factor which should work in their favor. And it is always good to remember that over the last seventeen years, for fourteen times, that is, in 82.35% of the cases, the highest price of the harvest has occurred between October and February. 

Monday is a new day and the start of the last quarter of the year. I believe the market will start to see the crushing numbers for the 2018/2019 harvest which are already popping up here and there – an obvious reduction in view of the stagnation of the production of ATR that the sector has seen over the last 7-8 years. A bank pretty close to the sugar-alcohol sector estimates a crushing in the Center-South of 560 million tons of sugarcane for next year. Other analysts put a ceiling of 590 million tons of sugarcane. But there are people betting on up to 625 million tons of sugarcane, a number which, according to an executive from the sector, is so high that “even if we planted sugarcane in the bunk system we would not reach”. To be seen.

The last quarter of the year usually holds better prices for us. Over the last five harvests, the average price for October traded on the futures sugar market in NY has been superior to that traded in September. Over the last fifteen harvests, 87% of the times the average price seen in October has been better than that of September – but how much better? On the average of the last five years, it has been better by 12%. Over the last fifteen years, by only 7%. The model of forecast of Archer points to an average price in October of 15.37 cents per pound, with a 16.72-cents-per-pound peak and a 14.02-cents-per-pound floor. The model hopes for a 2.71% error more or less. 

The registrations for the XXIX Course on the Futures, Options and Derivatives in Agricultural Commodities which will be held on March 6, 7 and 8, 2018 in São Paulo, SP, at the Hotel Wall Street are already open. First come, first served so don’t leave it to the last minute because the last edition ran out 40 days in advance. Don’t miss out on this opportunity. For further information:

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Have a nice weekend.

Arnaldo Luiz Corrêa

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