The sugar futures contract in NY expiring July/2019 closed Friday’s session trading at 11.70 cents per pound, on a day of low volume, probably due to the holiday.
The funds keep adding new sales to their already voluminous enough short positions. According to the COT report released by CFTC on Friday, but based on the position of last Tuesday, the funds were 186,733 lots net short. This amounts to 9.5 million tons of sugar, way beyond any world surplus number you may have heard in the market.
Were rationality to be part of the equation of these aggressive sales generated by algorithms, there would surely be more caution on the part of the funds not to increase their risk given the positive perspective of the medium- and long-term fundamentals in sugar. However, as discussed here sometimes, rationality hasn’t been consistently present on the market of commodities recently.
The assumption we have discussed that the funds could be repeating the same strategy used in the last quarter last year when they were heavily long on energy and heavily short on soft commodities, is losing strength. Back then, when the funds settled their operations to take profit, they sold the energy commodities and repurchased the softs, causing coffee and sugar to go up sharply. Oil dropped this week and so did sugar.
Oil dropping and dollar going back to R$4.0100 worsens the arbitrage of ethanol with gas and introduces a little more volatility to the sugar price. Also, the July and October spread in NY is another complicating factor which prevents sugar from responding positively. What happens is that the market expects sugar physical delivery against the maturity of the July contract in NY, which expires at the end of June, to be of sugars from Central America again. This makes the holders of July long positions, which under no circumstance want to get sugar from these destinations, resell their long positions rolling them over to the next maturity, and so pressuring the spread.
In India, Narandra Modi’s landslide victory, reelected as Prime-Minister strengthens the aid policy for the sugarcane producers. In that country, the sugarcane price is traded at three times the value paid for the raw material in the Center-South of Brazil.
The only news in the week that could have affected the market (upward) was China agreeing to take away the 50% surcharge on Brazilian sugar. The market tried to bounce back, but it was a negligible reaction.
What surprises us now as far as the market goes, which does not open this Monday due to the holiday in the United States (Memorial Day), is the huge position of the funds. With the huge unrealized profit, they must have at this moment, in comparison to the average price, the vulnerability of this position points to a bullish scenario.
Any small spark, small tremor which can sensitize some fund manager to take profit can be fatal, especially if we take into account that most mills have rolled over part of their positions originally attributed to July to October, possibly decreasing the liquidity that the funds would have when rolling over or settling the position. And what about the question we made the other day: would you stay short at 12 cents per pound on the medium-long term?
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.
You all have a nice weekend.
Arnaldo Luiz Corrêa
