The sugar futures market in NY closed this week well, at a 24-point high (a little over 5 dollars per ton) in the contract maturing in March/2019, closing Friday at 13.36 cents per pound. The 13.50-cents-per-pound level seems to be an important resistance to be broken, if the fundamentals help out.
The real is weaker than what was thought before Bolsonaro took office. It was believed that with the expectation of reforms to be implemented by the new president, the quotation of the American currency would suffer great pressure. So far, we haven’t seen this happening. The mills use occasional peaks of the dollar and already fix their commitments for March/2020. They are few but active mills and they aim at fixing around R$1,250 per FOB ton.
Although we believe the sugar fundamentals are constructive, they still need to be consolidated: improved domestic demand for industrialized foods and beverages, increase in the Otto cycle consumption, perspective of national GDP pick-up, increase in light vehicle sales in addition to oil holding up on the foreign market. These are the ingredients. We have to wait and see how this will play out.
A book that deserves to be part of the library of every commodities market executive is When Genius Failed which is about the rise and fall of the fund management company Long-Term Capital Market (LTCM), worth more than US$100 billion, run by two Nobel Prize in Economics laureates, the Canadian Myron Scholes (Chicago School) and the New Yorker Robert Merton (MIT), both co-creators of the famous formula widely used by the financial market to calculate the fair value of the premium of an option: Black & Scholes. Both, together with Fischer Black, won the Nobel Prize in Economics in 1997 for this feat.
Between 1994 and 1998, LCTM provided an average return of amazing 40% per year to its stockholders. However, due to the huge leverage built by complicated operations involving intricate forms of arbitrage, whose notional value will go beyond US$1 trillion, the fund lost US$1.9 billion in a given month triggering the imminent collapse on the world financial market, forcing the American Central Bank to intervene to ward off an even greater panic and financial disaster. Scholes believed in the mathematical models which provided him with false security regarding the heavy positions he used to take and he fell flat on his face. Those who operate are aware of the assumptions and restrictions of the Black & Scholes formula and of the limitations of predictability and sensibility of the Greeks, which are the varied derivatives of the formula. It is said that Scholes himself, after the fund broke, found out the event (here understood as how many standard deviations would take for its occurrence) could only occur every 12,000 years. He broke another fund in 2008, but that’s another story.
Since the beginning of time, somewhere someone has been trying to develop a formula or mathematical model that will show “the way, the truth and the life” and ultimately predict the value that such asset will trade at. On the commodities market, Forecasting Commodity Markets, by Julian Roche tried to tread along the technical analysis, fundamentalist and econometric analysis, including the accuracy of the methodologies used to predict prices and make decisions based on it. We must be very careful to believe that a model or mathematical formula will show us the trajectory of the market prices. But man is a curious creature.
I remember that a financial institution in the recent past “pitched” to some companies in the sugar-alcohol sector the idea of liability insurance for ethanol. Such product was based on a spectacular formula which contained several assets that reproduced with considerable adherence the ethanol price. In other words, this group of assets, duly pondered by the ultra-secret formula could estimate with great adherence the ethanol price. It didn’t take six months for the assets that were part of this basket to decouple from ethanol in a frightening way. If geniuses fail, imagine mere mortals.
There are only five 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.
This comment will be off for two weeks, returning on the weekend of March 16 and 17. It will be just for two weeks. It will be back in no time.
Have a nice weekend and see you soon.
Arnaldo Luiz Corrêa
The sugar futures market in NY closed this week well, at a 24-point high (a little over 5 dollars per ton) in the contract maturing in March/2019, closing Friday at 13.36 cents per pound. The 13.50-cents-per-pound level seems to be an important resistance to be broken, if the fundamentals help out.
The real is weaker than what was thought before Bolsonaro took office. It was believed that with the expectation of reforms to be implemented by the new president, the quotation of the American currency would suffer great pressure. So far, we haven’t seen this happening. The mills use occasional peaks of the dollar and already fix their commitments for March/2020. They are few but active mills and they aim at fixing around R$1,250 per FOB ton.
Although we believe the sugar fundamentals are constructive, they still need to be consolidated: improved domestic demand for industrialized foods and drinks, increase in the Otto cycle consumption, perspective of national GDP pick-up, increase in light vehicle sales in addition to oil holding up on the foreign market. These are the ingredients. We have to wait and see how this will play out.
A book that deserves to be part of the library of every commodities market executive is When Genius Failed (in Portuguese “Quando os Gênios Falham” by Roger Lowenstein) which is about the rise and fall of the resource management company Long-Term Capital Market (LTCM), worth more than US$100 billion, run by two Nobel Prize in Economics laureates, the Canadian Myron Scholes (Chicago School) and the New Yorker Robert Merton (MIT), both co-creators of the famous formula widely used by the financial market to calculate the fair value of the premium of an option: Black & Scholes. Both, together with Fischer Black, won the Nobel Prize in Economics in 1997 for this feat.
Between 1994 and 1998, LCTM provided an average return of amazing 40% per year to its stockholders. However, due to the huge leverage built by complicated operations involving intricate forms of arbitrage, whose notional value will go beyond US$1 trillion, the fund lost US$1.9 billion in a given month triggering the imminent collapse on the world financial market, forcing the American Central Bank to intervene to ward off an even greater panic and financial disaster. Scholes believed in the mathematical models which provided him with false security regarding the heavy positions he used to take and he fell flat on his face. Those who operate are aware of the assumptions and restrictions of the Black & Scholes formula and of the limitations of predictability and sensibility of the Greeks, which are the varied derivatives of the formula. It is said that Scholes himself, after the fund broke, found out the event (here understood as how many standard deviations would take for its occurrence) could only occur every 12,000 years. He broke another fund in 2008, but that’s another story.
Since the beginning of time, somewhere someone has been trying to develop a formula or mathematical model that will show “the way, the truth and the life” and ultimately predict the value that such asset will trade at. On the commodities market, Forecasting Commodity Markets, by Julian Roche tried to tread along the technical analysis, fundamentalist and econometric analysis, including the accuracy of the methodologies used to predict prices and make decisions based on it. We must be very careful to believe that a model or mathematical formula will show us the trajectory of the market prices. But man is a curious creature.
I remember that a financial institution in the recent past “pitched” to some companies in the sugar-alcohol sector the idea of liability insurance for ethanol. Such product was based on a spectacular formula which contained several assets that reproduced with considerable adherence the ethanol price. In other words, this group of assets, duly pondered by the ultra-secret formula could estimate with great adherence the ethanol price. It didn’t take six months for the assets that were part of this basket to decouple from ethanol in a frightening way. If geniuses fail, imagine mere mortals.
There are only five 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.
This comment will be off for two weeks, returning on the weekend of March 16 and 17. It will be just for two weeks. It will be back in no time.
Have a nice weekend and see you soon.
Arnaldo Luiz Corrêa
