POSITION OF FUNDS INCREASES CHANCE OF DISRUPTION IN PRICES
New York closed Friday’s trading session with March/2020 at 12.35 cents per pound, virtually unchanged against last week’s. The surprising thing was the position of the funds released by CFTC based on Tuesday: they increased the volume of contracts short to a new record of 203,000, which explains the steep fall we saw in sugar this week, leaving analysts dumbfounded and mills worried. Once again this backs up this scribe’s theory that the funds, moved by algorithms, robots and mathematical models, couldn’t care less about the fundamentals.
Actually, our theory just gets proven to be true. The funds continue pressuring the soft commodities as a counterpart of the long position which they build on the energy market. October’s accumulated shows that coffee and sugar have been the soft commodities that have dropped the most, while energy, natural gas, gas and oil commodities have gone up.
How much longer will this go on? Until there is a disruption in the fundamentals which will pull the trigger on the covering of this huge short position by the funds. On the other hand, increasing the short by these levels, as far as the funds are concerned, has limited risk, whereas the long position in energy has been bringing profits – so much so that some energy market analysts abroad believe that oil has a great potential for a high trend right in the first quarter of 2020. In other words, the funds can keep on pressuring sugar if they feel that the high trend in energy justifies the operation.
This fall in prices in NY early in the week, bringing the quotations to the lowest level of a month, has been virtually recovered over the last two days when the fundamentals were present.
Any bearish news hitting the sugar market lately doesn’t originate from Brazil. The situation in the country shows what everybody already knows: growing cycle Otto fuel consumption, the prospect of an increase in GDP fostering the consumption of food and drinks, reduction of sugarcane cultivated area, lack of new investments, maintenance of favorable mix to ethanol.
In times of algorithms, artificial intelligence, mathematical models and robots, the question is whether a short position of more than 200,000 contracts is vulnerable or not.
The NY Stock Exchange crashed 90 years ago this Friday. Panicky investors fought for the narrow windowsills of the tall buildings with the pigeons and jumped off disheartened by the loss of value of their stocks.
Next week in São Paulo we will hold the tenth Sugar Dinner Brazil, when the top thinking heads of the local and world sugar market will get together at a gala dinner sponsored by the Sugar Club, entity I had the honor to be the first president of at an inaugural dinner in 2001 and today is headed by Rui Sabino. Several events will take place during the week, which guarantees that ethanol consumption will stay high. I think the tone will be constructive as far as prices go, considering that the fundamentals confirm this thesis.
I wish all those coming to São Paulo a safe trip.
Arnaldo Luiz Corrêa
