New York closed the week with sugar futures contract for October/2019 at 12.02 cents per pound, a 43-point high or almost 10 dollars per ton against the previous week. The lower prices in NY early last week were preparing the market for new lows. It’s obvious that the combination of depressed prices and low volatility inhibit tradings from positioning themselves aggressively on the market. The funds, in turn, added on more short and in the COT report based on Tuesday’s position were no less than 160,497 lots short.
The long lean period for the sugar trading companies living with extremely reduced margins, as well as the high credit risk when commercially dealing with companies in serious financial difficulties, keep trading companies from taking more aggressive steps. Besides, the constant and irritating slumber on the physical sugar market decreases inventory turnover and requires more working capital to keep the wheel spinning. Were things in current times different, the trading companies would be heavily long on this market both in the futures and in the basis.
Inventory turnover is a key element in the dynamics of the commodities market. Markets whose inventory turnover is high provide smaller margin, better competitiveness, and increase the possibility of new entrants – mainly small and medium-size ones – creating a healthy result for the whole segment.
On the other hand, the decrease in turnover can often make it impossible for some companies to stay in the business. A decrease in turnover from 50 days to 90 days, for example, would require about 80% more financial resources from the trading houses just to keep the same revenue. As this is not always feasible, they are forced to reduce the organizational structure, or transfer this cost to the producer through the increase in discount offered on the product purchased, or increase selectivity making the companies less financially healthy having to offer greater discounts on their products, or increase the risk on the derivative markets. The sugar market seems to be at this stage where these alternatives are combined in several proportions.
A futures broker in the USA has alerted that the OI on the sugar market showed little change with the rally last week, that is, there has been no coverage of short positions by the funds. This makes the position of the funds more vulnerable, though pretty comfortably because the funds are not seen to be concerned over the current position. So, although the fundamentals are around, I believe this slight recovery we have seen over this week still needs strengthening. The recovery is premature and some signs have to occur so that this strengthening starts taking shape.
Among the main signs which would support this thesis (market recovery), the narrowing of the October/March spread comes first. It’s difficult to assume, fundamentally speaking, that we are on a constructive market, with the October/March spread trading at 100 points, which corresponds to carrying charges of 21% per year in dollars!!! Evidently, this occurs due to the anemia of the physical market, the increasing discounts given and the fear of a big sugar delivery in NY for late September, when the October contract expires. Secondly, the physical market shows some reaction when the basis gets stronger. Neither of these signs has yet been seen.
On the other hand, the market in NY has been simply or practically influenced by the funds and algorithms. We just have to look at the erratic behavior they have had. They fluctuate in an abrupt manner even though nothing has happened as far as the fundamentals go. An experienced trader alerts that “he wouldn’t rule out the fact that we have an important market player delivering a pretty large volume in October to bring the market down”.
In real life, the number published by UNICA is worrying. We are 4% late against the same period last year, a fall of almost 11% in sugar production, an 8% shrinking in ATR, or 5.5 kilos less per ton of sugarcane. Meanwhile, ethanol sale continues going up. These two points together might be explosive when September comes.
We still believe that 12 cents per pound in NY is an excellent buying opportunity. Hydrous ethanol is trading at 200 points above NY on the weekly average. The market reaction, considering the position of the funds, might go for this parity. I think we can still see a rally of 200 points or more in this year’s last quarter.
The 32nd Intensive Course on Futures, Options and Derivatives – Agricultural Commodities will take place a month from now, on August 27 (Tuesday), 28 (Wednesday) and 29 (Thursday), 2019 in São Paulo, SP at the Hotel Wall Street near Paulista. Seventy per cent 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
