NY closed the week a little more appreciated with March/2020 trading at 12.55 cents per pound, 8 points better than the previous week’s closing. Turnover over the last 30 days has been disappointing. Indeed, while the average volume of October was 87,600 daily contracts, September hit 236,000 contracts. The robots must be running out of batteries.
The sugar market is a little more optimistic after the Sugar Week in Brazil, which took place the week before last. Although the fundamentals take some time to reflect on the prices traded at the NY exchange, most traders who gathered at the event seem to agree that the sugar contract in NY doesn’t have much room to fall. Clearly, the restriction on this argument lies in the ever-present possibility that the long-short funds will add more sales to the volume they already have, that way pressing the futures prices.
A long-short fund has a reasonably simple operation – it holds certain assets long and in addition sells assets it does not own. The goal of a long-short fund is to find an asset it believes will go up (and for that it buys) and sell an asset it predicts will fall (and for that it sells). By investing in both, it hopes to increase the return significantly – it’s as simple as that.
Depending on the appetite for risk and the perception they have that the energy market can vigorously go up in the first quarter of 2020, the funds can continue selling sugar (or other soft commodities) in order to be able to buy more oil, gas, etc. This pressure distorts the understanding the fundamentalist analysts have built about the sugar market.
Some signals, however, start undermining the comfort on the part of the funds that sugar can wait ad infinitum for some price recovery. The consumption of Otto Cycle fuel is one of these signals. The consumption of September/2019 has topped the consumption of the same month last year by 6.1%. In the yearly accumulated, the period between January/September has been 3.6% higher than the same period last year. And over the year over year (from October/2018 to September/2019) the consumption growth has been 2.6%.
Archer Consulting forecast is that we will close out this year at a total consumption of 53,785 billion liters of equivalent gas. For 2020, our number comes to 56.2 billion liters, which other reputable analysts in the sector believe is extremely conservative.
That fact is that today ethanol represents 48.5% of the fuel consumption in Brazil (equivalent gas) and our estimate for next year shows that the potential ethanol consumption in Brazil can get up to 34.4 billion liters, which represents about 425 million tons of sugarcane. If we take into account domestic sugar consumption, exports of bulk and white sugar, and ethanol export of a billion liters, our need next year is for about 660 million tons of sugarcane. Assuming that the North/Northeast produces 47 million tons of sugarcane, the Center-South would need to produce 613 million tons of sugarcane in the 2020/2021 harvest. There won’t be enough product – that’s what this comic opera boils down to.
On the other hand, the world is already anticipating a smaller sugar harvest in Thailand, a 17% reduction against the previous year (14.5 x 12.0 million tons of sugar); a smaller harvest in India (between 26.0 and 26.5 million tons of sugar) and a slightly smaller harvest in Europe.
The bears have strong arguments to think the market will have great difficulty bouncing back. They mention, for example, the world stocks which are largely in the hands of India and China; the fact that the next harvest will also be in favor of ethanol and that the mills with financial constraints will start the harvest blasting the ethanol market so as to build cash flow; and that there are still a lot of sugar trading contracts from the Center-South to be fixed against March/2020, inflated by the roll-overs the mills have made to try to capture some price recovery.
We believe that in the worst-case scenario the maximum amount of sugar from this current harvest still pending fixation on the part of the Center-South should come to 6 million tons of sugar. This position is smaller than 2/3 of the volume the funds carry today.
The perspective of substantial recovery in the economic performance in Brazil should make families consume more in 2020 – more industrialized food, more beverages, and soft drinks, more cars, more sugar, and more fuel. We might be in for a surprise. We believe Brazil will have a carry-over smaller than those of previous harvests – both sugar and ethanol. We have enough reasons to believe we will see 14 cents per pound between January and February/2020, but there is nothing to stop the market from responding before this.
Over the last 20 years, 70% of the times the highest price has occurred over December/January/February. The average price of the daily closing of the first trading month at the NY exchange in September (October futures contract) was 11.16 cents per pound. October’s average price (March futures contract) was 130 points better, which explained the rollover from October to March. Usually, November’s average price is the same as the previous month, with a slight variation.
Note: The funds have reduced the position by 17,000 contracts over the week, and now they have 178,000 sold contracts.
With a new interpretation of the Constitution, the Federal Supreme Court has ruled that nobody can be arrested before all the appeal possibilities in higher courts have been exhausted. This was a blow to the face of the good Brazilian citizen who is now watching desolately and incredulously the release from prison of the criminal and third-degree scoundrel called Lula da Silva, the greatest criminal this country has ever produced. Only those who cannot afford good lawyers will be arrested today. A feeling of shame that makes every taxpayer’s soul hurts. The polarization in the country should get worse now that the mule charmer is on the loose – the fight goes on.
Are you planning on joining more than a thousand professionals who have already taken Archer Consulting Intensive Course on Futures, Options, and Derivatives? So, hurry up. The XXXIII edition has been set for March/2020, on March 24, 25 and 26, at the Hotel Wall Street, on Rua Itapeva, in São Paulo, SP.
Arnaldo Luiz Corrêa
