Last week some readers rightly “complained” about this scribe’s lack of inspiration on the last weekly comments. It was actually really hard to write about a market that kept on trading within a boring price range over endless seven consecutive weeks. We noticed that it (the market) was waiting on a break. And it ended up coming at the start of the week in a surprising way.
The Trading Manual says that when a huge volume of a commodity is delivered at the exchange when the futures contract expires, the market sees it as a bearish sign, because if a huge volume is delivered at the exchange, it means that there was no better buyer on the market and, therefore, the exchange is the last resource the seller had to get rid of his product.
The opposite must be true; that is, when a small volume of a commodity is delivered against the expiration of a futures contract, then that is a bullish sign, right? No, it is also bearish because there is no demand. It sounds like a joke, but it’s not. Regardless of the news, the fundamentals or the market behavior, it seems like any movement will be thought of as being bearish from now on. And that’s that.
The sugar witches are on the loose and a simple sneeze on the market turns into double pneumonia right away. And there is no antibiotic to cure this disease. The sugar futures market in NY closed the week falling sharply, and finally breaking the price range of 12 and 13 cents per pound, which the market had been in for seven weeks. Friday’s closing, with July/2019 trading at 11.98 cents per pound, raised even further the concern of the mills which rolled over their non-fixed position against May to July hoping for better days. This doubt brings panic onto the decision-making table again. The market can suffer even more.
Might May delivery have had some influence? It might have helped the funds increase their comfortable short positions above the market. And it might have triggered stop sales or even structured operations with derivatives which had disappearance levels (knock-outs).
A bit of history about deliveries in May – in 1997, so exactly 22 years ago, Copersucar made its first delivery of physical sugar at the NY exchange. It was the first time a Brazilian producer had this “courage”. It’s true that other Brazilian producers had already delivered sugar at the exchange, but through trading companies. On the other side of the counter, the recipient (an American trading company) was fully convinced that the sugar it would get would come from Thailand and had already prepared all its logistics to receive the Thai sugar and then meet the sugar demand in that continent. At the time, it was said that the Thai sugar the American trading company was going to receive was for Russia. When the April 30 session was over, the exchange published the deliverer and port of origin, as required by contract, and the market was dumbfounded on receiving the news: a Brazilian producer delivering more than 5,200 contracts at the exchange, a high volume at the time when the open position was around 180,000 contracts. In proportion to the volume, it’s as if today the delivery was 26,000 contracts.
The dumbfounded American trading company was in a jam. It didn’t have any sugar to keep to the commitments in Russia, had already signed the shipment contract of the non-existent Thai sugar and didn’t have what to do with the sugar it was going to get from the Brazilian producer at the Paranaguá port. At the time, the market expected a trading company’s loss (maybe exaggerated) around US$10 million. The fact is that the delivery of Copersucar went down in the annals of the market and definitely projected the name of the company worldwide, getting huge respectability as an important sugar negotiator.
The sugar delivery at the maturity date of the May/2019 contract in NY also had a soap opera plot edge to it. First, over some sessions, the market got scared of the erratic behavior of the May/July spread which had been devaluing rapidly totally out of tune with the general feeling that there will be smaller availability of sugar on the part of Brazil. Then, at the last sessions in April, the May/July spread devalued even further even trading with a 70-point discount. What would be behind this movement?
The market speculated that a big trading company had strongly bet that it would get sugar from the Center-South at the maturity date of the futures contract of May. When the traders involved in the business noticed that the movement in the NY contract showed that the sugar to be delivered at the exchange was coming from sellers’ contracts spread all around Argentina, Mexico and Central America, the potential recipients of sugar applied the operation “get me out of here”. An experienced market trader comments that “the problem with getting a lot of sugar at a time, from several ports, significantly increases the freight cost” and the operation must have cost at least 6 million dollars. Another trader, a constant flyer in the executive class to Europe, commented with his usual good mood, “The guys (traders involved in the operation) must be on IV now”.
And now where is the market headed? India has informed that it has produced a record harvest. There is sugar left over in Thailand and India and, as some readers have observed, this scribe seems to ignore this and keeps the same argument that Brazil will deal the cards. I might truly be inveterately stubborn but when we look at the numbers of ethanol consumption, the positive perspective for oil abroad, the ATR production limitation on the part of the Center-South, the lack of cultural care and the stagnant situation of the industry, I wouldn’t have sold sugar at 12 cents per pound.
Gas and real are two important points to be looked at. Gas price increase abroad, regardless of the trajectory of the real, doesn’t foster the production of more sugar. Drop on gas price and appreciation of the Brazilian currency can change the mix. The real appreciation is just not enough for mills to produce more sugar. Does staying short sold at 12 cents per pound seem to be a good bet?
The 32nd Intensive Course on Futures, Options and Derivatives – Agricultural Commodities will take place on August 27 (Tuesday), 28 (Wednesday) and 29 (Thursday), 2019 in São Paulo, SP at the Hotel Wall Street near Paulista. Don’t leave it to the last minute. Over 1,000 professionals have already attended it and they consider it to be the best course on agricultural derivatives in Brazil.
Have a nice weekend.
Arnaldo Luiz Corrêa
