The sugar futures market in NY closed Friday with May/2019 at 12.56 cents per pound, a 38-point hike in the week, or a little over 8 dollars per ton. Our opinion is that this 2019/2020 harvest will make sugar available later than it had been thought and the market should react accordingly as soon as these perceptions prove to be real. The market is slowly starting to design a correction.
We are not asserting here that we have a bullish scenario, but that there is an exaggeration as to the recent low which followed the same path in other commodities from the soft group (coffee, for instance) and also less sugarcane to be crushed and lower ATR (Archer Consulting has yet to finalize its forecast) should point to crushing between 562-565 million tons of sugarcane in the Center-South.
Let’s take a look at the price curve of the futures market in NY in order to create an argument about the above assertion. The contract for May/2019 is with an exaggerated discount against the contract for May/2020 if we compare this one with the following year maturity. In short, if we smooth the curve from May/2021 to now, the price for May/2019 should be 12.98 cents per pound only using this criterion. It is clear that the curve exhibits distortion due to sales pressure on the part of the funds (which are mega-positioned with 135,000 contracts short). The odds that this correction will happen is being signaled, albeit timidly, by the narrowing of the spread K/N.
There doesn’t seem to be any doubt that the start of the sugarcane harvest in the Center-South will be more about ethanol. There is still no consensus about the ATR, but most mills don’t believe last year’s yield will repeat itself this year, that is, we might have less sugarcane, less ATR and a sugar mix even lower than the first forecasts. It will still take some weeks before this perception proves to be real.
Now the climate experts believe we will have a lot of rain in the fall and winter, which can harm the production flow. In May 2010, just as a reminder, the sugar market was trading at 13 cents per pound in NY while renowned gurus pointed to 10 cents as almost certain. Heavy rains hit the Center-South causing the collapse of the roads that lead to the ports and the warehousing space shortage. In September (only four months later) NY hit 27 cents and everybody knows how this story played out. We are not saying this will happen again, but we have to be cautious and not stay short on a market at 12.50 cents per pound.
Industrial sugar consumers should look at the long run and make calculations comparing the current values of the commodity to the recent past and check if we are not at a moment of opportunity to fix prices. A 13.50 cents put for October/2020, for instance, is worth 124 points. Selling it – and if the market matures below 13.50 cents per pound in September 2020 – means buying at 12.26 cents per pound, or 160 points below Friday’s closing. If it’s not exercised, at least it is 27 dollars per ton of premium in the pocket to help diminish the cost of acquisition of raw material.
There is still a spot for the XXI Intensive Course on Futures, Options and Derivatives in Agricultural Commodities which will take place next week, on March 19 (Tuesday), 20 (Wednesday) and 21 (Thursday) at the Hotel Paulista Wall Street in Bela Vista in São Paulo (SP). The course has already been given to more than 1,200 professionals in Brazil and abroad and 100% of the participants have positively evaluated it.
Have a great weekend.
Arnaldo Luiz Corrêa
