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The futures sugar market in NY closed the week with October/2018 below 11.00 cents per pound, depreciated by 39 points against the previous week, an 8.60 dollar loss per ton. Based on Friday’s exchange rate closing, a ton of sugar would get to the Port of Santos at R$930, way below the target of R$1,050 many mills had been going for.

The non-indexed funds continue calling the shots on the sugar market and, as it always happens in market situations similar to the one we are going through, what is seen is an exaggeration which puts way too much pressure on prices just like it did at other times when it pushed up prices way above a reasonable level.

The fundamentals also play a big role and have been reflected in the price for a long time. And the latest news is more constructive. A smaller amount of sugarcane crushing in the Center-South creeping up on 555 million tons of sugarcane; the fear that the crushing will end earlier than expected, clear worsening of the sugarcane field which, according to some experts in the agricultural area of the mills, will be felt after this month’s second fortnight crushing and all next month’s crushing; reduction of sugarcane and ATR together. I wonder if the bulls have gone on vacation.

At the moment what is off in this apparently constructive scenario is that on one side we have pretty aggressive funds selling futures, acting on the coffee market – another one of the pretty much devalued soft commodities – as strongly. Within the structure that has been designed, the funds are long – energy (oil and gas, for example) – and short – softs. In the YTD, sugar and coffee have plummeted 28% and 12 %, respectively, while gas and oil have gone up by 18% and 14%, respectively, over the same period. The funds are short by almost 100,000 contracts in sugar NY.

A fund, for instance, which has invested US$100 million of notional (the total value of asset at a leveraged position) in the long side and US$100 million in the short side, that is, zero level of added exposure, today would have US$36 million on hand if it divided the position equally between long and short of the mentioned commodities. The position the funds hold today in sugar represents a notional value above US$1 billion. 

If the position of the funds were mostly based on sugar, for instance, chances are the funds, at current price levels, would already have repurchased the short position and pocketed the profit. However, the approach of the funds in a long-short strategy, which is the one they are committed to, is to look at the whole scenario. As they are making a lot of money out of the oil high and also out of the coffee and sugar low in the short-selling positions, there is no hurry to settle the position.

That was very clear two weeks ago, for instance, when oil plummeted (WTI) and at the same time coffee and sugar went up, and the traders of these commodities were not able to explain the reasons for it in a dispassionate way. Let’s face it. The potential for gain in a short position at current levels is limited. But the rationale behind the decision making of the funds is how much money they are making in the energy market. It is as simple as that.

But that is not all. The most gruesome ingredient of this equation which limits an eventual high in prices is the infamous delay of the mills in pricing. Archer Consulting has found that up until June, the mills had fixed 68.5% of the 2018/2019 harvest, an alarmingly low number if we compare it to 2016/2017 when, over the same period, almost 95% had already been fixed. The fixations kept being rolled over to the following maturities in the hope of better prices, which never happened and left a sword over the head of the mills now that they are being pressured by the time and the ship horn sounding at the port.

On the other side of the planet, the information is that Thailand can change its culture replacing another more profitable culture for sugarcane. The production cost in Thailand must be around 16.50-17.00 cents per pound, keeping in mind that the Thai currency was the one which has appreciated the most against the dollar in comparison to the other currencies of emerging countries. In India, the producers will continue with the sugarcane since there is no alternative, but there are doubts whether the government will subsidize exports after the elections. There is a greater willingness for the Indian government to help keep the stocks internally. In other words, although the world has a huge amount of surplus, the Indian production will not necessarily get to the foreign market at these low prices.

This is your last chance – after that only in March/2019. 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. There are still five spots available.

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Have a nice weekend.


Arnaldo Luiz Corrêa

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