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The futures sugar market in NY closed at a low for the eleventh week in a row for the despair of the traders who were trying to make it through the week of the sugar dinner held in NY, under a mood of concern and discouragement. July/2018 closed Friday at 11.22 cents per pound which corresponds to a 29-point fall (a little over 6 dollars per ton) against the previous week’s closing.

For those who attended the events of the week, the tone was pretty bearish, crowned with the prediction by an analyst who said that the sugar market in NY might trade at 8 cents per pound in light of the world surplus, the huge production in Thailand, the inventories arising in India and, dear reader, add to that whatever else comes to your mind because the world seems to have come to its end – but it has not.

The delay in the realization of the sale hedges by some mills, part of this volume still related to the 2017/2018 season which was kept rolling ad infinitum in the hopes for better days, and the worsening of the perception of the trajectory of the real against the American currency according to the foreign scenario, and also the exit of foreign investors, pressure the sugar quotations even further. The closing of the dollar on Friday at R$3.6010 places sugar in NY at equivalent 928 reals per ton, pretty close to when NY was 100 points better six weeks ago with the dollar quoted at R$3.3300.

The mills that have debt in dollar and, therefore, do not think in real per ton, were somehow run over by those that guide themselves by the settlement in reals. It is easy to spread panic at these moments. Another thing that helped the quotations fall (not taking into account the infamous and frayed surplus) is the massive number of fence operations made to protect the mills against the price fall. As it is known, they consist of buying an out of the money put and selling an out of the money call, providing a minimum remuneration if the market collapses in exchange for a maximum remuneration if the market goes up.

In addition to these points above, a large number of calls was sold by the mills or on their behalf to add value to the final price of the fixation. It turns out that with the market fall, these calls ended up turning to dust (not being exercised) making those who had sold the options, aiming to be exercised and add value to, find themselves without the hedge despite pocketing the sold premium. However, they had to sell futures to fix their contracts effectively. More pressure.

The bearish mood is so wide that the Bloomberg TV channel started a report about sugar last week with the headline: “Sugar! If you are a trader, definitely you are shorting it”

The question everybody asks is if the market has already fallen enough. That’s difficult to answer because we don’t know, for example, how many mills are being or will be affected by the OTC strategies with accumulators. These operations settle a daily number of lots depending on the price range traded on a certain day. If the market is below the agreed level between the parties, there is no fixation at all. So, as a trader who he is up to his neck in this type of operation confessed to me, the effective percentage of fixed volume was much smaller than what he expected (less than 30%). Therefore, he will have to turn to the market fixing his contracts by selling futures.

Accumulators are great for markets that range within a limited price interval. Markets with a strong upward or downward tendency are a disaster for this type of structure. When they fall too much, you have no hedge. When they go up too much, you are double short. There is no free lunch. And nothing replaces a good risk management whose strategy you own and can change whenever you find it convenient.

Despite the heavy clouds over the market, some points deserve to be gone over again here. Gas stations are already selling ethanol below 65% of the parity. The consumer takes some time to notice this, but today’s advantage comes to R$1.5000 per liter (today I saw a gas station with gas at R$4.1900 and ethanol at r$2.6900). This will cause a spectacular increase in ethanol consumption and in the constant decrease in the sugar mix. We can still have uncertainties with regard to the weather both in the Center-South and in India. The conflict in the Middle East can drive up oil price even further and the real can still have other high peaks. Will it be eight cents? Would anybody like to take a guess?

Registrations for the 30th Intensive Course on Futures, Options and Derivatives – Agricultural Commodities are open. The course will be held on August 7, 8 and 9 in São Paulo-SP at the Hotel Wall Street on Rua Itapeva. If you plan on taking it, remember that spots are limited and in the last events they ran out 40 days before the course started.

The book “Derivativos Agrícolas”, written by journalist Carlos Raices and me, is already available on Amazon Books, iTunes, Google Play, Kobo and Livraria Cultura.

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Have a nice weekend everybody.


Arnaldo Luiz Corrêa

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