The long-awaited new cycle of high and the consolidation of the sugar market in NY have not yet materialized. After the sugar futures contract in NY for March/2019 having traded above 14.20 cents per pound in the third week of October, driven by the short-covering of the non-index funds, the market plunged to close to 12.50 cents per pound, a small 9-point fall against the previous week.
Paradoxically, the crop forecast numbers out of India are more constructive now that the consensus that there will be a sugar production failure of that country is taking shape. Brazil numbers also show that the current crop should close around 550-560 million tons of sugarcane and that the next one – though with a greater volume of sugarcane – will have a much lower yield than that seen this year. However, the steep movement seen on the futures market was caused much more by the acceleration of the settlement of the non-index funds than by the change of the sugar fundamentals which became more constructive. The old crystal clear example that the futures markets – especially that of commodities – go overbought on the high and go oversold on the low.
The performance of oil and gas on the foreign markets was decisive for the speed-up of the sugar price fall in NY. Two weeks ago we said that both the oil trend and the real trend would be determinant for the price trajectory sugar would take.
Although the real has behaved pretty well, not having appreciated just because the macro scenario kept it from doing so, the fact is that oil has fallen by more than 14% this month (WTI) while gas has melted by 10%, but both have accumulated decreases of more than 20% over the last 30 days. The mills do the math and recognize that under this scenario gas has room to fall below R$ 4.0000 per liter at the pump very fast. If oil price doesn’t pick up by the end of the year – and the fundamentals don’t seem to contribute to this happening – the production planning for the 2019/2020 crop will make the Center-South mills look at sugar more tenderly.
The International Sugar Organization has disclosed production cuts in Brazil, India, the European Union, and Pakistan, substantially reducing the world surplus to 2.17 million tons of sugar from 6.75. This is news that could, as soon as the markets notice these reductions in-loco, open room for some price recovery.
The sector will have to pay close attention to the development of some important issues within the next 2-3 months. What will be the impact on the price at the pump and on the hydrous consumption when all the gas price fall on the foreign market – more than 20% over thirty days – is passed on to the distributors by Petrobras? What is the reaction of the big companies, which stock ethanol to take advantage of the off-season period of a market that has been pretty heated up until then, if the target price they had in mind is not reached? What will the production mix for next year be? How skillful will Bolsonaro’s government be in order to get the reforms approved and foster the economy in early 2019? Will we have enough sugar and ethanol stock to make it through the off-season period if the economy heats up?
For those mills that are already fixed in May/2019 there is still plenty of time to think about the next expirations. But for those with the fixation for 2019/2020 below 25% of the total volume, an alternative can be to buy puts at exercise price close to 13 cents per pound, financed with calls with a longer maturity. The mills must be careful with accumulators these days so that they won’t get killed later (no pun intended). Accumulators, under this environment, rid the companies of specific risks and bet on the market staying within a certain price interval. In a trajectory switch which leads the market beyond the limits, pain is a sure thing.
A warning sign is that the non-index funds are short again (they couldn’t stand being long for too long); based on last Tuesday, when the CFTC made its survey, they were over 25,000 contracts short.
A Brazilian executive coming from NY was impatiently waiting at the airport bar in Miami for a connecting flight to continue his trip to Brazil since the non-stop flight from that city had been canceled due to bad weather. To relax, he ordered a “cachaça” shot, not without asking the server about the price first. “That’s thirteen dollars”, he heard from the server. Next to him, a guy under some ethyl effect couldn’t help himself and told the executive in Portuguese, “Expensive, isn’t it? You can buy a mill in Brazil at that value”. And then he walked away.
Registrations for the XXXI Intensive Course on Futures, Options and Derivatives in Agricultural Commodities, which will take place on March 19 (Tuesday), March 20 (Wednesday) and March 21 (Thursday), 2019 at the Hotel Paulista Wall Street, in Bela Vista, in São Paulo (SP), are open. For further information, send an email to priscilla@archerconsulting.com.br. We recommend that the participant read the book Derivativos Agrícolas, which can be found at iTunes, Amazon, Livraria Cultura or www.estantevirtual.com.br, before attending the course.
Have a nice weekend.
Arnaldo Luiz Corrêa
