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FALLACIES AND OPPORTUNITIES
22/06/2018

This has been a quiet week on the sugar market, maybe due to the World Cup or even due to the total lack of activity on the physical market. NY closed at 12.05 cents per pound, practically unchanged compared to last week.

A discussion we have been hearing a lot on the market is about the influence of the dollar on the sugar price in NY. There is the perception among a lot of traders that a real devaluation against the American currency necessarily entails a drop on the sugar quotations on the futures market in NY. The numbers don’t confirm this suspicion. The closing data we have collected on sugar in NY and the real since early this year shows a correlation close to zero.

We have observed the correlation within shorter periods to try and find some trend taking shape. Using 20 days, we come to -0.50 at the most; that is, a change in the dollar would affect the sugar price by just half of the variation. For example, the dollar goes up 1% and the sugar drops 0.5% – nothing consistent. A reason for this mismatch might be the gas pricing mechanism which is built on the foreign oil prices. Positive variations of the American currency are seen by the market as higher price for the fuel at the pump, better ethanol compensation and, therefore, mitigating or eliminating the possible effect they would have on the sugar price in NY. It is another one of those fallacies wiped out by the numbers.

I have always insisted on the need for the mills to look very closely at the movement of the spreads on the futures sugar market. The spreads unequivocally reflect on the futures market the perception that the participants of the market have about the movement of the physical market. While the price trajectory on the futures market can sometimes be driven by technical reasons which go beyond the market fundamentals (the case of the funds that push up and pull down due to the huge volume), it is the spread which reflects on the futures market the actual movements and perceptions of the physical market of the product. 

On the weekly comment of the weekend of April 13, we said here that, “The October/2018-March/2019 spread ended Friday at 118 points, representing a carry equivalent to 24.3% per year, inviting the attentive industrial consumers to sharpen their pencils to take advantage of this huge distortion”. What should the mills do? They should roll over their October positions to March as much as they could in order to capture this distortion, or just buy the spread (the purchase of October’s futures along with the sales of March’s futures), knowing that there will be a lack of sugarcane and the spread would necessarily narrow.

What happened? – well, the spread closed last Friday at 57 points; that is, if the mill had followed our warning here, today it would be making – without taking directional risk, because the spread isn’t directional – 13.45 dollars per ton. If it had bet on just 100,000 tons, today it would have pocketed a profit equivalent to R$2.50 per bag. It is a lot of cash on the table for no one to care about it.

On a different note, in São Paulo, early last week, UNICA sponsored an excellent event with eight of the most important presidential candidates. With the competent coordination of the journalist William Waack, the candidates had 15 minutes to talk freely to more than 600 people from the sugar-alcohol sector about what they would do about the fuel price policy. After that, the candidates answered some questions made by the journalist and by two different directors of companies from the sector.

It is a tough choice – not because of the quality of the candidates, but actually because of the lack of it. Only João Amoedo, from the Partido Novo (New Party) and Jair Bolsonaro, from PSL (Social Liberal Party), who leads the polls, seem to agree to the privatization of Petrobras, although the latter didn’t make it so clear. Marina, in a language that sounded pretty much like Portuguese, cannot develop a logical thinking. Ciro Gomes is statist and spews numbers lacking truthfulness, such as the cost of the oil barrel in the pre-salt, which he says is 8 dollars per barrel, or the public debt, which he says is due in four days. His election would be the worst catastrophe that could happen to the sugar-alcohol sector. Meirelles does not represent anything new and has the charisma of a fern and Alckmin is not exciting. What a phase!

The 30th Intensive Course on Futures, Options and Derivatives – Agricultural Commodities will be held on August 7, 8 and 9 in São Paulo-SP at the Hotel Wall Street on Rua Itapeva.

If you want to get our weekly comments on sugar straight through your email, just sign up on our site by logging onto http://archerconsulting.com.br/cadastro/

Have a nice weekend.

 

Arnaldo Luiz Corrêa

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