A Bottomless Pit: Sugar Market Pressured

The sugar market has begun the year extremely pressured, surprising a large portion of traders and analysts (myself included) who did not believe that prices could breach the low of 15.93 cents per pound occurred in July of last year. At the end of December the market did trade at 15.86, but the new low now is 15.10 cents per pound, the lowest price since June of 2010.

If you make an opinion you are subject to be wrong. There were several reasons given to justify the market in the 15 cents territory. The main one was the real devaluation in relation to the dollar, which hit 2.4380 and according to some renowned economists should peak at 2.7500 throughout the year, closing then at 2.4500.

It is important to notice that although Mar/14 in NY has closed at 15.22 cents this Friday, representing a drop little higher than 7 dollars per ton for the week and accumulating this year a negative variation of 7.00 %, the values in reals per ton have shown a slightly better performance. I explain. The lowest value traded last year was 783.20 reals per ton while the average price in 2013 was 864.39 reals per ton. Friday’s close is equivalent at 819.60 reals per ton. To equal the minimum value of last tear, NY will have to trade at 14.55 cents per pound, with the dollar at Friday’s close printing at 2.3460.

Have the fundamentals of the market changed so significantly after the fire at the Santos port warehouses last year for the market to drop 425 points (93.70 dollars per ton) since after the high occurred on that Oct 18th date? Out of these 425 points, 150 “belong” to the real devaluation. The funds changed their hands heavily. Before they were long 200.000 lots at an average price of 18.49 cents and probably got hurt with this crazy position. Now they are short 110.000 contracts. In other words, over 300.000 lots have pressured the markets.

The physical trades of sugar have not helped either with the discounts showing weakness. It seems like a bottomless pit. Sugar for January shipment out of Santos port is being trader at up to 50 points of discount, while March has traded at H4 plus 2. The carrying costs hidden in these 2 months show 23 % per year, in dollars. This demonstrated the need for immediate cash by some mills and of course the lack of demand, which pressure the discounts downwards.

The other 275 points of drop can be attributed not only to the lack of demand but also due to the cold shower that the damaging intervention by Dilma and Mantega caused plus the non-approval of the methodology for automatic readjustments of prices that was proposed by the Petrobras council and negated by this dynamic duo. In the days preceding the meeting about this matter, the sugar market traded at 18 cents per pound.

By the second consecutive year, the average price traded in NY was lower than the previous one. The average price in 2011 was 27.10 cents per pound, in 2012 was 21.57 (a drop of 20.4 %) and in 2013 it was 17.47 cents (a further drop of 19.0 %). In this century, only in 2002 and 2007, besides the years mentioned, have shown averages lower than the previous year. The record of consecutive years of lows is currently 5, from 1995 to 1999. The year we have with the highest average was 1980, when we saw 30.27 cents per pound. The lowest average was in 1966, with 1.97 cents per pound! Since 2005 the moving average of 3 years had been ascending for a period of 8 years (a record) which was interrupted now in 2013.

The fourth estimate by Archer Consulting of price fixations of sugar in NY by the mills, for the 2014/15 crop, shows a percentage of 36 % and an average price of 17.46 cents per pound.

An interesting commentary about the sugar market volatility has been published in the monthly edition of Jan/14 of the Archer News (an exclusive publication for our clients), made by the guest writer Philip Passen, a well-known options trader in NY. “Unfortunately we do not see this period of cheap volatility ending on the short run. We feel a tendency whereby the traders sell short-term volatility and buy long term (2015), since the level of uncertainty for the 12 to 18 months horizon is a lot greater than the 3 months window. Maybe the first ral opportunity to see an increase of volatilities will be in Apr/May when we will begin to see the new data for the sugar cane crushing in Brazil. Any delay in production in Brazil may begin to create an atmosphere of uncertainty and the result may be the buying of calls with higher exercise prices and consequently a firmer volatility”.

It is always good to laugh. A renowned attorney of the sector tells us a vignette about an executive of a mill near bankruptcy who went to a competing lawyer’s office and inquired: “I know you are a very expensive practice so I would like to know if I can ask you 2 questions for five thousand reals? Of course, they replied, now tell us what is the second question?”

As I return to the weekly commentaries schedule, I would like to wish all readers and excellent 2014!