Arm Wrestling

The NY sugar market closed the week slightly higher by 11 points (2.50 dollars per ton) for Jul/13, quoted at 17.53 cents per pound. May/13 expired and with it we had a record delivery of 28.210 lots, equivalents to 1.433.136 tons of sugar, almost all of it being of Brazils (only 30.000 from Costa Rica). With May/13 exiting at 17.67 cents per pound, the notional value of the delivery is an astonishing US$ 580 million. Two trading companies were the main sellers of that volume, Noble with 728.000 tons and Dreyfus with 670.000. On the receiving end, we had Cargill with 761.000 tons, Wilmar with almost 400.000 and Bunge with 274.000 tons. A delivery of this magnitude can be considered anything but bullish. However, there are some points to be revisited.

The average price of entry of the funds, as per estimate of the Future Analysis Consulting prepared upon request by Archer Consulting, is 18.89 cents per pound. In other words, with Friday’s close of 17.53 cents per pound, considering a position of 100.000 lots short, the funds have a non-realized profit of US$ 150 million. The situation for the shorts is of absolute comfort. The market is well below the average entry price and a short covering/profit taking should only occur if the market begins to signal a visit to the 18 cents vicinity which, let us face it, will be difficult if things remain as dull. As we have said here plenty, an upward market will happen only if we have a weather related or an extra fundamentals event.

The sugar futures market already traded this year 10.600.000 lots, a little over 6% of increase when compared to the same period last year (9.940.000 lots). A bigger crop in the Center South almost in the same proportion may be one of the reasons for it. The fact is that in a cash and carry market the tendency is that the fixations are done as late as possible, since the market is “paying” for one to carry the sugar. In other words, the value of the quotes of the farther away months is greater than the nearby ones. This is typical of markets where there is a balance between supply and demand. The buyer postpones his purchase even he pays more for it ahead, since the additional value paid (reflected in the futures quote) is less than what costs him to anticipate the purchase financially plus the storage costs and insurance. Pure arithmetic. Also, the buyer gives preference to use up all of his inventory before making new purchases. That is why demand has been anemic these past few months.

To the mills in general, if there were no need for immediate cash to attend to needs that cannot be postponed, and sufficient storage capacity, likewise they would not have to sell immediately their product. But we are only speaking theoretically here.

This same theory however may give us some indication of the market direction. Its trajectory in the next months may be changed if there are changes in the equation. The global surplus is reflected in the prices already, this is a fact. What may adversely affect still is the uncertainty about the volume yet to be fixed by the mills still against Jul/13 and after that the size of the Indian crop beginning in Oct/13. What may affect the market positively, on the other hand, is an eventual diminishing of the crushing days due to the weather (to some mills, a day without crushing is a lost day, that is, sugar cane not crushed and left for the next crop), or a logistical glut at the port (a problem with no immediate solution) and an eventual rush to rebuild inventory (less likely, it is true, but possible).

When there is a delivery of sugar against NY of this magnitude, the most obvious fact is that there were no better buyers than the exchange and therefore the seller dumped their sales there. Period. Unquestionable. But on the other hand, what makes a company to take this volume (like the buyers mentioned above) depends on a competent strategy of commercialization and an elaborate financial engineering plus a close following on the spreads, an important gauge in the short term analysis. Who is going to win this arm wrestling? This answer will be given us in a couple of months. In the last 100 sessions, the sugar market has oscillated between the low of 17.13 cents and high of 19.75 cents, that is, 262 points of oscillation since December 6th of 2012.

Do not forget to note on your agenda: The 7th edition of the Brazil Sugar Dinner will take place on October 21st 2013, in Sao Paulo at the Estacao Julio Prestes for only 700 guests. In the following day we will have the Sugar Party for 1500 people. For the latter event, if you wish to attend, hurry up as tickets are limited. For more information please access the site www.sugardinner.com.br.

Have a good week.