The sugar market in NY closed out the week with the first trading month – March/2020 – at 13.18 cents per pound, 24 points above the previous week’s closing, a little over 5 dollars per ton in gain. We commented last week that we felt a more positive wave toward the sugar prices. And in our understanding, this is only starting.
Meanwhile, the funds have reduced their short positions by 20,000 contracts and up until last Tuesday, according to the weekly report released by the CFTC (Commodity Futures Trading Commission), they were holding onto a 76,000-lot position.
The WTI and Brent oil contracts went up during the week by 7.2% and 6.4%, respectively, followed by coffee, whose movement has little fundamentalist coverage and has a whole lot more to do with the coverage of the funds, commented on here previously, when we said that sugar could be influenced by coffee, which is seeing a frantic short-covering by the funds. Analysts believe the oil will go up further at the start of the first quarter of 2020.
Just to adequately put it into the context, in the yearly accumulated WTI oil has already appreciated 30%, RBOB gas has gone up 26.5% and coffee has appreciated 22% while sugar dwindles in the 10% increase.
However, not everything is a bed of roses. After not paying the bondholders US$9 million which were due in early November, a sugarcane mill might also put off paying debts worth about US$230 million, which are due in early 2020. This is awful news not just for the mill in question but also for the other mills which might be going through a renegotiation process of their debts.
The sector debt increases above the inflation rate and the real devaluation affect the total value of the debt, one-third of it being in American currency. Archer Consulting estimates that over the last twelve months the sector debt has increased by 7.58%, reaching 104.32 billion real – a huge amount of money. A large part of the current debt started getting built in 2009/2010 when the dollar was worth less than R$2.
The Archer Consulting price forecast model assumes that the average price of the daily sugar closings in December should come to 13.09 cents per pound.
Curiously enough, the average closing price of the first maturity month of the sugar futures contract in NY in 2018 was 12.24 cents per pound. So far, the average price in NY in 2019 has been 12.25 cents per pound, that is, 0.08% more. The low volatility of the sugar encourages the funds to keep their short positions for a long period of time – not because they think sugar will fall, but because it fluctuates less and decreases the risk in a possible joint operation, such as oil against sugar.
The market received Archer Consulting fixing volume, released last week, as being well below the expectations. The model says that up until October 16.7% of sugar for export from the 2020/2021 harvest had been fixed. The market believes that this number is around 25%. An important note is that the volume of sugar futures contracts traded in October was less than half of that traded in September (4.7 million contracts against 2.0 million).
Economists from the Credit Suisse believe that next year the continued approval of some proposals and an improvement on the government agenda should create an environment of low inflation and interest rates, with stronger growth of the economy. The bank believes that the GDP will grow by 2.5% in 2020 and 2.7% in 2021, driven by household consumption and investments.
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
