The week was shortened by the holiday in Brazil on Tuesday and Thanksgiving in the United States. But, despite this, the sugar market closed the week at a 22-point low, or almost five dollars per ton, with March quoted at 12.47 cents per pound.
The commodities’ performance in the monthly accumulated, especially those on the energy market, have been pivotal for sugar to keep its bad mood. Gas, WTI and Brent oil fell apart with losses around 20% in November only. Natural gas, however, went up by 34% (see history below). As we said, oil in decline means pressure on ethanol, although it is still competitive. The fair gas price at the pump, taking into account the average value traded in 100 consumer countries and bearing in mind the 27% of anhydrous mix, should be R$4.0700 per liter, that is, there is room for gas price drop until the 70% of parity is kept.
The funds seem to be observing which direction to take. The daily volume of contracts traded in November has fallen by 27% against the previous month. The daily closing average of sugar in NY combined with the dollar according to the rate supplied by the Central Bank showed the equivalent to R$1.138 per FOB ton with pol premium. November so far has been R$25 per ton below this value. The more constructive fundamentals will only appear over time, when the market has a more concrete idea about next year’s harvest size (which we think will be smaller in ATR).
An executive from the market sends a message on WhatsApp disagreeing with my last week’s comment about the sector focusing more on sugar next year and he goes, “I can’t understand where so much pessimism comes from. With a new government, as bad as it might be, it will be better than a PT’s (Workers Party) government. If Bolsonaro doesn’t complicate things, Brazil will take off on its own. The better the GDP is, the better the consumption is.”
Brazilian sugar exports from November/2017 to October/2018 add up to 21,958 million tons, 26.3% less than that of the same period last year. Based on the forecasts, it is possible Brazil’s export volume for 2018/2019 (April/March) is 19.2 million tons of sugar only, which would represent a 31% fall against the previous year. If this forecast is correct, the fixed percentage of sugar for the harvest is, therefore, greater than what we had predicted, since the base now is smaller.
James Cordier, author of the successful book among traders, “The Complete Guide to Option Selling: How Selling Options Can Lead to Stellar Returns in Bull and Bear Markets”, featured one of the most bizarre episodes there has ever been on the commodities market last week. Cordier managed a fund whose clientele was made up of very wealthy people. He also ran a site www.optionsellers.com (which was taken down) where he recommended strategies.
It turns out that Cordier took a huge short position of out-of-the-money calls in natural gas possibly to try to make the performance of his fund close 2018 in positive territory since he had already lost money in the recent oil hike (when he was uncovered) before. Cordier was “humiliated” by the market for having taken what is called “tail risk”, that is, the probability of the asset changing prices beyond three standard deviations. This is as if today in sugar someone started selling calls heavily at the exercise price of 23 cents per pound, whose probability of turning around the futures contract at maturity is only 0.5% (three deviations), according to the closing released by ICE. Does anyone believe in sugar at 23 cents per pound in March? Well, this is the risk that Cordier decided to take.
Margin calls, taken out of quotes by the investors and compulsory liquidation on the part of the FCM’s which were operating for him, cleaned up all the money from the fund, estimated at US$580 million. What is bizarre about it is not only how investors get genius mixed up with leverage but also the video Cordier himself posted for his 290 investors in his US$10 thousand suit, Rolex and gold cufflinks, crying crocodile tears and blaming the huge wave he couldn’t see coming and wiped out all the money. How noble of him!
It’s scary how people don’t realize that risk management is a serious business. How much condescension gurus who lose other people’s money in strategies which are sheer gaming are treated with is even scarier. See video at https://youtube/VNYNMM0hXXY
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 (Agricultural Derivatives), 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
