In six months, more precisely from November/2018 to April/2019, the daily closing average of the sugar futures contract with the shortest maturity in NY fluctuated 200 points only, having reached the daily 13.54-cent-per-pound high and the 11.55-cent-per-pound low.
If we look at the closing average of the mentioned months only, we start at 12.82 cents per pound in November/18, 12.57 in December, 12.67 in January, 12.93 in February, 12.47 in March and 12.54 in April. Although the sampling is small, we can say that at the current pace, with 95% of certainty, the average of the closings of the present month would be at most 35 points away from the average of the previous month, up or down. That is, May/2019 would close with the average between 12.19 and 12.98 cents per pound. If you, dear reader, were not convinced about the weakness and boredom of the market, here is a solid argument.
For a market moving like a sluggish slug, being short sugar in NY at 12 cents per pound seems to be an act of courage featured by the funds that, actually, speculate with other people’s money. Several signs are shown in the day-to-day of those keeping track of the sugar and ethanol physical, which corroborate with our understanding.
That the quality of the raw material this year is bad is noticeable – old sugarcane field, more fibrous sugarcane, therefore, with less sugar content. The surprising output of ethanol from mills is also noticeable, breaking volume records. Stock levels are exactly half of that in May/2018 (2.3 billion of liters against 1.0, according to BioAgência). The hydrous prices are trading between 1.9500 and 1.9800 real per liter, with taxes, which is equal to sugar in NY plus 150 points of premium, and yet the market does not react.
We have discussed here several times that the sugar price in NY depends on the trajectory of the oil prices combined with the dollar. However, follow the extreme alternatives with me:
Note that, even in situations, which would push sugar price downward, taking into account the competitive advantage of ethanol now, this pressure would be limited up to the level where the “fat” in fuel price was exhausted.
Nevertheless, the funds are heavily short sold. They increased the position by 47,000 contracts just this week, raising the total to 123,000 (more than 6.2 million tons of sugar). Some analysts believe that the funds are rebuilding the same winning strategy used last quarter last year which consisted of going long energy (oil, gas, gas for heating) and going short soft commodities (coffee, sugar, orange juice, cotton). Maybe it makes sense. Over the last 30 days, the commodities that have dropped the most were the soft ones (cotton 12.4%, orange juice 11.7%, sugar 8.34% and coffee 5.6%) whereas the energy ones performed at least 10 percentage points better – stay tuned.
The model developed by Archer Consulting shows that – up until late April/19 – the mills had been fixed by 11.35 million tons for the 2019/2020 harvest finding that there has been a slowdown on the part of the mills to fix their sugar after January. This is probably due to a better expectation of return from domestic hydrous ethanol, which encourages the mills to reduce the production of the commodity and diminish the rhythm of future sales.
The model has also corrected a distortion of the number released late January, which pointed to 11.9 million, when in fact it was 10.2 million tons only. The average established price of fixations is R$1,164 per FOB ton, with polarization premium, equivalent to 50.66 cents per pound (in this case, without polarization).
The fixed percentage (estimated at 54%) is slightly over the same period last year when the percentage reached 52.68% and has been below the accumulated average for April since Archer started releasing the numbers in 2012/2013, which is 62.25%. Many mills have rolled over their fixations originally for May/2019 to the next maturity because of the narrowing of the spread, which made the rollover worth it. This might also have been one of the reasons for the slowdown of the fixation rhythm.
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. Do not leave it to the last minute. Over 1,000 professionals have already attended it and they consider it the best course on agricultural derivatives in Brazil.
We wish all our female readers a Happy Mother’s Day.
Everybody have a nice week.
Nice trip to all those coming to NY for the sugar week. Good businesses!
Arnaldo Luiz Corrêa
