The sugar futures market in NY had a lively week with the contract maturing in March/2020 closing out Friday at 12.82 cents per pound, a 10% growth against last week. In terms of real per ton, Friday’s closing showed R$1,235 FOB Santos equivalent (with polarization). This represents R$65 more per ton in the mill’s pocket above the average of the closing over the last 40 working days, that is, a growth for the mills that held back on their fixations in order to obtain better prices and that ultimately managed to.
According to the CFTC (Commodity Futures Trading Commission), the funds are short by 112,000 contracts reducing the position in the week (keeping in mind that the numbers always refer to the previous Tuesday) by about 40,000 contracts. Might the funds be changing their strategy to stay short and decided to zero out and keep buying? It’s too early to say, but it’s not impossible.
The long-short funds, those which position themselves on the commodities futures market buying a certain asset and, at the same time, selling another asset in such a way that the notional value of both is equal, can be realigning their positions. Let me explain: in the past, what we saw (and this is this scriber’s personal understanding) was funds buying energy (WTI, Brent oil and gas) and simultaneously selling softs (coffee, sugar, cocoa, orange juice, and cotton) – that might have changed and I will explain below.
Note that in this month’s accumulated the coffee futures market in NY went up by about 13%, cocoa went up 9% and sugar went up 2.5% only. WTI oil also went up 7%, Brent oil 6.6%, and RBOB gas 5%. Looking at this growth, what I just mentioned in the previous paragraph doesn’t seem to make any sense, because energy and softs should move in opposite directions. My take, however, is that the funds can be exchanging softs (repurchasing what was sold) and selling grains instead. In the weekly accumulated, soy has dropped 4% and corn has dropped 3%.
If this theory has a minimum plausibility, we can see the funds keeping on repurchasing their short positions and evidently bring the market to higher levels. The irrefutable fact, however, is that the mills are doing their homework. They are starting to speed up their fixations for the 2020/2021 harvest – they are already fixed way above the historic percentage in some. The average sugar closing in NY converted into real by the Central Bank rate for November is at R$1,190 per ton, R$110 better per ton than the average from April to September. It’s no wonder the mills held out for better days.
Now, if you look at the prices in real per ton for 2020/2021, they are at R$1,260 on average. Have no doubt that the mills will continue capitalizing, even if the market in NY signals with some strength that we will hit 14 cents per pound in the first quarter of 2020 at the latest.
Archer Consulting estimates that the mills’ debt last October 31 added up to R$104.32 billion, about 1/3 of which in dollars and the balance in real. The debt growth over the last twelve months has been 7.6% It’s estimated that this debt is at R$170.72 per ton of crushed sugarcane.
All through this year, not once have the Brazilian monthly sugar exports go beyond two million tons, an unprecedented event since 2005 when we exported 18.2 million tons of sugar. The accumulated from January to October this year adds up to 14.6 million tons of sugar and projects a total export of 17.4 million tons of sugar for 2019, the lowest volume since 2004. Brazil should close out the year at an 18.9% drop against last year’s volume.
Over the last twelve months, the average value of exports has been 12.62 cents per pound. Over the same period, Brazil exported 1.8 billion liters which made the equivalent in sugar at almost 14 cents per pound.
The coffee market has gone through an amazing price recovery for reasons which are not very clear from the fundamental point of view. Rumors had it that a great Brazilian co-op had been forced to repurchase its short position in NY and fostered the increase in quotations. On the other hand, the funds with their robots and algorithms zeroed out the short position and have now become long. The decision-making process has been getting more and more complicated. Strong rumors also have it that companies here and abroad are bleeding with poorly-structured over-the-counter operations – the usual suspects for a change.
A sugar broker based in NY, closely watching what happens on the coffee market, came out with, “When will the funds that are short in sugar ever look at coffee and say: something is going on there [in the coffee]; let’s cover our position?” The gray-haired broker casts his prophecy: “Coffee is sugar tomorrow – keep an eye open”.
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
