The sugar market closed Friday at 12.73 cents per pound for March/2019, 13 points above the previous week’s closing, that is, nothing new going on.
The possible effects of the infamous drought commented on last week are still hanging in the air. São Paulo countryside had a good volume of rainfall and what the neutralizing effect it carries is remains to be seen.
The world market prices haven’t responded at all up to now to the perspectives of a smaller sugarcane crop in the Center-South. The world stock/consumption ratio is high, thus making traders act calmly and unhurriedly when executing their strategies and putting together their trading books. However, the behavior of the March/May spread on the sugar futures market in NY is striking.
Spreads usually mirror the expectations of the physical market reflected on the futures market. I mean, if the physical market traders (buyers, trading companies, industrial consumers) fear that the product availability can be smaller than the one previously foreseen, they roll back their purchasing (hedged, for instance, in May) until the month with the shortest maturity (in the example, March). To operationalize this, they place the buying order in the futures market by buying the month with the shortest maturity and selling the month with the longest maturity (May). In practice, the month the hedge had been allocated in was zeroed out and the effective purchase hedge will be in the shortest month. The spreads account for more than 60% of the whole exchange-traded volume. Their traders, for the most part, are intimately linked to the physical.
About the March/May spread again, just two weeks ago March was trading at a 16 point-discount against May. This Friday, the same spread closed at a 6-point premium. The futures market just about remained at the same boring price range, but the spread appreciated almost 5 dollars per ton over a two-week period. What motivates such movement is the perception of delay in sugar availability at the start of the 19/20 crop.
If the mills knew how valuable the information they have at home is, they would surely turn this information into money. When the trading companies visit the mills at the beginning of the crop year, they do so to get information about sugar availability, production mix, how early or late the start of the crushing will be, among other things. This is the role of trading companies. There is nothing wrong with that at all. After this survey, it’s up to the traders along with the help of the market intelligence staff to put together strategies – mainly for spreads – based on the conclusions obtained from the visits.
Trading spreads has its advantages. It’s not directional since it doesn’t depend on the market trajectory. Therefore, it has fewer risks. While a futures trade demands a guaranteed margin from the NY Exchange, for instance, US$1.000 per contract, the spread margin is one third or one-fourth of that value.
Archer Consulting’s overriding goal is to spread knowledge about the futures market, options and derivatives to as many people as possible, whether they are directly linked to the business or just interested in it. We believe that the more professionals understand the working mechanisms of the derivative market, the healthier the corporate business results will be and the more products will be made available for the market participants to mitigate risks and optimize margins.
The already famous Sugar Conference in Dubai starts this Sunday and will run through Wednesday. Over the last years, the effect on the NY quotations has been minimal. The market, however, is so anxious for news that can bring the least enthusiasm for its participants and loyal followers that if some waiter inadvertently drops a tray on the floor during the Gala Dinner and it makes a loud noise, the futures market might react strongly. Let’s wait and see.
There are very few spots left for the for the XXXI Intensive Course on Futures, Options and Derivatives in Agricultural Commodities will be held 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). The number of spots is limited. 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.
You all have a nice weekend and those going to Dubai, have a safe trip.
Arnaldo Luiz Corrêa
