No market holds up Trump’s tweets. The North American president took the financial world by surprise by imposing a 10% tariff on US$300 billion of Chinese products. The markets plummeted right away, especially energy (oil and gas melted) and so did the other commodities through osmosis. Trump’s attitude hits Jerome Powell, current Chairman of the FED, who is up against the wall to cut the American interest rates even further – a poker game with serious consequences for the global economy.
Brazil and the United States have reduced their interest rates and, in theory, opened up opportunities for the commodities in general. However, there has been an opposite response. The markets will have a panicked reaction to the stormy news tweeted by Trump until people pull themselves together and realize that the fundamentals of the sugar market haven’t changed a bit.
On Friday, the sugar market closed the week with October/2019 traded at 12.01 cents per pound – unchanged compared to the previous week. The funds reduced the short position to 134,000 lots based on Tuesday, July 30 report. However, due to the turbulence that the market went through this week, it is pretty plausible that the funds have increased the short position over this period again. Some project it to be between 9 and 12 thousand lots.
July has gone and the average of the daily closings of the sugar futures contract in NY (first month on the screen) was 12.13 cents per pound, keeping the average range since October/18 from 11.83 to 13.18 cents per pound. We haven’t had such a long period of restricted prices at only 136 points in ages, although we are talking about averages. In 2006/2007, we also went through a pretty boring period in terms of price fluctuation, but in relative terms, the current period has been the worst in 20 years – the price range over the average price is a little above 10% (136 points over an average price of 12.56 cents per pound).
It’s interesting to see that the funds built part of the short position in July at levels that are way below the market today. As an ethanol market veteran says, “We see who is naked only when the swimming pool is empty”. Will the funds cover themselves faster than we had expected? We’re betting they will as long as exogenous factors don’t get in the way.
Hydrous price keeps going up. According to CEPEA-Esalq, the fuel price has reached R$1.7253 net of taxes per liter at the mill, which takes into account the sugar closing in NY for October/2019 at 12.01 cents per pound, means that hydrous is trading with a premium of 191 points over sugar. Raise your hand if you will produce sugar. Not only are mills producing as much ethanol as they can but the consumer has also embraced ethanol once and for all, with sales breaking new records.
10.7 billion liters of hydrous were consumed over the first semester of this year, according to data from the ANP (Oil National Agency), a volume 33% greater than that consumed over the first quarter last year. However, despite this record hydrous consumption, in the annual consumption of fuel, gas-equivalent is still 0.13% lower against the same period last year.
We cannot but comment that the funds are at a position pretty close to the recent record when they reached 189,000 sold lots. Technically, according to experts on the subject, if after all this pressure the market keeps breathing with its nose above the 12-cent-per pound line, it is difficult to see us having greater price depreciation. Therefore, we are back to that maxim caused by some past comments: who dares staying short at 12 cents?
The 32nd Intensive Course on Futures, Options and Derivatives – Agricultural Commodities will take place in three weeks, on August 27 (Tuesday), 28 (Wednesday) and 29 (Thursday), 2019 in São Paulo, SP at the Hotel Wall Street near Paulista. There are only 3 spots left. 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
