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Sugar

ARE THEY ANALYSTS OR DAYDREAMERS?
15/11/2019

Receives weekly comments from the market







New York closed out the week with March/2019 trading at 12.73 cents per pound, 16 points better than it was the previous week (3.50 dollars per ton). The market has for some time now been within such a boring price range that the averages of 50, 100 and 200 days are pretty close to each other: 12.09, 11.94 and 12.18 cents per pound, respectively. The last time this narrowing has occurred was in February/2018.

In the week shortened by Friday’s holiday in Brazil two things surprised the traders: first, March/2019 futures contract which hit 12.92 cents per pound influenced by the news about the impact created by the cold and rains which struck the Red River Valley (which is responsible for almost 60% of the beet production) causing damage to the American harvest, and second, the volume of contracts traded at the NY exchange on Wednesday which was extraordinary and which had not been seen since September (more than 217,000 contracts).

In the first case, no analyst believes that the sugar situation in the USA is worrisome enough to drive the international market beyond 14 cents per pound, although contract #16, which represents the sugar traded on the American market (or from foreign origin with tax paid for by the deliverer), is being traded close to 28 cents per pound (twice as much as the international contract) and there’s talk about the need for importing 2.5 million tons of sugar to close the books.

Despite the analysts’ lack of concern, it’s worth noting that a sugar company from that country has left 1/3 of the production behind because it couldn’t harvest the beet due to the climate. Another two large companies claimed force majeure and won’t carry out the sugar delivery contract because they don’t have the product. Besides, the stock/consumption ratio has fallen to close to 10%. That is, either the market analysts are absolutely right and the American situation won’t contaminate the foreign market or they are a bunch of daydreamers. 

Going back to the NY sugar issue, this price recovery can be fed by the robust fund short-covering which as we know are heavily short (the CFTC numbers show they had been short until Tuesday by 158,000 contracts). They reduced the position by 20,000 contracts and the market fell by 12 points (12.71 against 12.59 on the two Tuesdays) – a clear sign that the mills seized the opportunity and started fixing their trading contracts for 2020/2021 by also using the upward curve of the dollar due to the transitory weakness of the Brazilian currency. Lots of hedge in reals have been made in combination with the pricing in NY, bringing the final values to close to R$1,350 per FOB ton.

The real continues on its downward trajectory against the dollar opening up the possibility of a lock-in price for the mills for the sugar to be produced in the 2020/2021 harvest. A fixation today for March/2021, using Friday’s closing and with exchange hedge, is equivalent to R$1,350 per ton. The most efficient mills of the Center-South have an average production cost between R$38 and R$40 per ex-mill bag.

The current sugar situation could be summarized like this: a) everybody believes we have already seen the lows; b) the market should look for higher levels (above 13 cents per pound), but nobody keeps from fixing their sugar for the 2020/2021 harvest if the value in real per ton is appealing; c) 14 cents per pound is still a dream, but not impossible; d) the weather situation in the USA is worrisome, but with smaller effects on international prices; e) the fact that the funds have covered 20,000 contracts  and the market has fluctuated negatively shows less upward strength.  

Things haven’t been going well for the CEO’s in the Northern hemisphere. In October, more than 170 large company executives listed in the United States either resigned or were kindly led out of the exit door, carrying their cardboard boxes with their stuff in them, by the security guard. It’s been a record number since the 2008 crisis. Reason: they didn’t deliver the profit they had promised.

The XXXIII Archer Consulting Intensive Course on Futures, Options and Derivatives has been set for March 24, 25 and 26, 2020 at the Hotel Wall Street, on Rua Itapeva, in São Paulo, SP. Don’t miss it. Join more than a thousand professionals who have already taken it.

 

Have a nice weekend.

         

Arnaldo Luiz Corrêa

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Receives weekly comments from the market