A 20% Increase In Futures Sugar Contracts

The futures sugar market in NY closed the week at 17.28 cents per pound for May/2014. That was a 70-point drop (or 15 dollars per ton) against last week. With no change in market fundamentals, we witnessed a 130-point melting compared to the maximum negotiated the week before and this week’s minimum, which scared a few of the most convinced bulls. Anyway, ethanol arbitrage with sugar brings some support on this market (anhydrous ethanol negotiates equivalent to sugar at 21 cents per pound FOB Santos). A market close to 17 cents per pound works up an appetite for buying.

The National Petroleum Agency has released the total fuel consumption for February/2014. In the accumulated total over twelve months (March/2013-February/2014), 31.8 billion liters of type A gas (no blend) were consumed, just a 0.25% increase over the same period last year. Now, ethanol had a 11.1 billion liters consumption for hydrous and 10.1 billion liters for anhydrous, a meaningful yearly increase of 14.3% and 28 % respectively. Altogether, the fuel consumption hit the 53 billion-liter mark, a 7.47% increase against last year. At this rate, taking it for granted that everything else stays unchanged, over the next four years, that is, until the 2017/2018 harvest, just to meet the fuel consumption which should come to another 17.4 billion liters over the next four harvests, the Center-South would have to grow 50 million tons of sugarcane at every new crop year, about 9% a year. You already know what will come out of this, dear readers.

The model developed by Archer Consulting shows that by March 31st, 2014, a little over 50% of the export sales are already fixed against the NY market, at 17.42 cents per pound on average, without polarization premium. This number is inferior to that of the same period last year when about 59% of the sales were already fixed at 19.32 cents on average. The average value in reals is R$40.35 per bag and the average dollar quote used by the mills was 2.3167.

Just out of curiosity, the average closing price at NY and of the dollar (by the Central Bank) from July/2013 to March/2014 was R$43.05 per bag. That makes us infer that the mills cannot take advantage of a stronger dollar all the time, or fix NY when there is a rally, or a combination of the two due to the already known factors such as lack of credit, flexibility with trading companies with which they have commercial contracts but which do not allow for price fixation over long periods until the actual shipment takes place. A lot of money is wasted when risk management is not taken into account.

Over this year’s first quarter, the futures sugar contract in NY has already negotiated 9,000,000 of contracts. This represents an increase of a little over 1,500,000 contracts against the same period last year, a 20% increase in volume. The return of the funds plus the increase in volatility makes for a larger turnover, within the more risk, the more returns binomial.

Michael Lewis is a well-known financial American journalist, author of several books, with an amazing gift to use accessible language even for those who are not so familiar with the financial market. Among his books there is one that every trader should read: Moneyball (which was made into a movie starred by Brad Pitt), published in 2003. With a solid academic background (Princeton), Michael worked for Salomon Brothers in London, resigning to write the made-into-a-movie book “Liar’s Poker” (which in Brazil was strangely called Don’t Trust Strangers) and to become a journalist. Today, Michael is an editor for Vanity Fair magazine and writes articles for The New York Times.

This week he was on 60 Minutes, and talked about High Frequency Traders (HFT), market operators who have access to really high speed networks allowing them to know at a fraction of seconds the buying order the investor has just put onto the market and buy in microseconds before anyone else, pushing up the asset price before the order can be finalized. That way, they buy and then sell for more to that buyer. It is estimated that 70% of the stock market is controlled by those people - a shameless legalization of manipulation. Well, this happens on the stock market, right? It is not about the commodities market, right? Wrong. ICE itself, exchange where sugar contract is negotiated, offers discount on negotiation fees for HFTs and, for a certain value, lets them set up their computers where the exchange has its own (the proximity allows them to gain valuable microseconds). Besides, the HFTs do not pay for guarantee margin for they do not carry over positions from one day to another. Meanwhile, trading companies, factories, refineries, sugar mills, industrial consumers and all those that are on the sugar trading chain pay for fees, guarantee margins and daily adjustments without any discount given from the exchange, which is only interested in making money. That is, we all have our own problems.

In February 2001, we commented on a newspaper article in Financial Times citing the tough letter that the World Committee of Sugar, a consulting group which brings together the great sugar negotiators, hedge funds, producer and refineries, sent to the NY Exchange criticizing the presence of “parasites” HFT (High Frequency Traders) funds “which only get rich at the expense of traditional market users”. I don’t know how this discussion turned out to be or if it was stifled. Dear reader, don’t think this happens only out there.