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Sugar

THE CAULDRON IS BOILING, BUT THE FROG HASN’T REALIZED IT YET
12/07/2019

Receives weekly comments from the market







The sugar futures market in NY closed Friday with October/2019 at 12.30 cents per pound, the lowest price registered since late May. Some analysts believe that the weakness of the physical market makes room for the futures sugar (read funds) to try and go for the 12 cents per pound again. That takes a lot of resignation.

In the monthly accumulated, coffee and sugar lead the falls among the soft commodities, the former with 2.65% and the latter with 2.54%. Oil, however, has gone up by 3%. The real appreciated well against the American currency thanks to the approval of the Social Security Reform in the first round by the House of Representatives. Hydrous improved slightly against the previous week, having been traded between R$2.0200 and R$2.0400 per liter, with ex-mill taxes. With sugar closing in NY at 12.30 cents per pound, hydrous is trading at a 170-point premium against sugar.

The October/19-March/20 spread is trading at 100 points, which corresponds to a 20.63% carry per year. Such a discount for October makes no sense unless there is a lot of sugar in the pipeline, of course, which is actually the case. Buying spread at the current levels, receiving sugar and redelivering in March seems like a tough job.

The non-indexed funds are short sold by about 84,500 lots (4.3 million tons of sugar). Last week, we questioned why the funds still insisted on keeping their short positions uncovered. A senior funds manager based in New York City and attentive reader of our weekly comments gently answered us, “a fund manager can be bullish 15 commodities but he can’t be long all 15, so he would be long the most bullish (in his view) and short the least bullish (in his view)”. That’s why!

The last UNICA report shows that the accumulated crushing up until the second half of June is 3% less than that of the same period last year. Sugar production is already almost 10% smaller and even ethanol is also 4.3% below last year’s volume.

The frost that hit coffee and sugar regions last week wasn’t enough to scare the market. However, we have found that it hit MS (Mato Grosso do Sul) hard. MG (Minas Gerais) and GO (Goiás) were hit a little, but we will take about 15 days to know its actual effect. An executive from a large mill says that the ATR found this July is 11-12 kilos below the one obtained last year. The great concern is that we might close the current harvest at just 130 ATR kilos per ton of sugarcane. Besides, according to the same professional, the harvest is delayed this year compared to last year.

So as to have an idea of the magnitude of this problem, if the number dreaded by this executive comes to happen, in the Archer Consulting model, this would represent a decrease of almost 700 thousand tons of sugar (our estimated production would decrease from 24.2 to 23.5 million tons of sugar) and 850 million liters of ethanol (decreasing our estimate from 30.3 to 29.5 billion of liters). There is, according to the same worrying analysis, risk of a supply shortage. The average ATR reduction that is has been going around is 2.6%.

It’s said that when the frog is put into a container with water at a similar temperature to that of the pond where it lives, it stays put while we heat the water up, not responding to the gradual increase in temperature until it is boiled to death. If, however, we were to throw the amphibian into a boiling hot cauldron, it would respond immediately and would jump out saving its skin, even if it were pretty scorched. The big shorts of this market, in our view, act like the boiled frog. They cannot feel the water heating up. We see the market cauldron slowly bubbling with the fundamentals pointing to a significant reduction in sugarcane yield. The frogs just croak.

We believe that the dose of reality will come in the last quarter of the year, affecting March/2020. However, we cannot rule out that October will still go through some strong price response as soon as all these problems related to the sugarcane and the yields are expressed in numbers.

There are still 45 days to go before the 32nd Intensive Course on Futures, Options and Derivatives – Agricultural Commodities, which will take place on August 27 (Tuesday), 28 (Wednesday) and 29 (Thursday), 2019 in São Paulo, SP at the Hotel Wall Street near Paulista. Fifty percent of the spots have already been filled. More than 1,000 professionals on the commodities market have already attended what they think is the best course on agricultural derivatives in Brazil. Don’t leave it to the last minute. The next one will be only in 2020.

Have a nice weekend.

 

Arnaldo Luiz Corrêa

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Receives weekly comments from the market