Commodities Remain Lethargic

The sugar market closed the week last week with a steep 60-point drop for May/13, hitting 18.20 cents per pound on Friday. The remaining months closed lower between 28 and 64 points, or 5 to 15 dollars per ton.

Blame it on the Cyprus effect or whatever, but the fact is that the NY sugar market was not able to stay for too long in 19 cents per pound territory. As we said last week, the strong liquidation by the funds liquidating their shorts moved the market only 100 points, indicating that a lot of people were fixing their contracts while the market was going up. Explicit weakness. On the other hand, some are arguing, the fear of leaving money in the bank and suffer the effect of some kind of insane measure(s) being proposed for the Mediterranean island, may make the commodities be seen as a safe ground.

For the time being, the commodities have been lethargic this month, and in the accumulated for the year, only cotton and orange juice are markedly higher, while wheat, sugar and coffee are in the red.

In the last 100 sessions, the sugar market has oscillated between the low of 17.61 cents per pound and the high of 20.03, that is 242 points of variation since Oct/12. If we compare the oscillation of these last 100 days with the arithmetic average of the closings on the same period, in relative values, we will note that the market has not been this dull since Feb/2005. I have been to wakes more exciting than this.

The points to be observed in regards to the Center-South crop in this beginning of the harvest are related to the weather so that if excessive rains in the beginning were to delay the crushing and send signs of worry to the funds (difficult, but we never know), then they may eventually turn their hands and become buyers as opposed to sellers. Also, the port congestion due to the shipping of the grains harvest may also influence in the trajectory of prices and/or premiums. There are less important questions at the moment but may increase in magnitude if they worsen. See what occurred, for instance, in May/10. The line of ships awaiting berth at the port is currently 25% bigger than last year.

No news to be noted with fundamentals. A trading company said that the global surplus of sugar will increase by 17%. Meanwhile, the sugar prices in the Indian internal marked have dropped to their lowest level in the last 8 months and melted in the internal Chinese market.

The monotony of the market diminishes considerably the appetite for options operations. Exception being with the fences, which consist of the buying of a put and the selling of a call, in case of producers, or the selling of a put and buying of a call, in case of consumers. The extremely low volatility of the market does not excite anyone to be short gamma (selling options naked). The average volatility annualized of the last 100 days is only 21.48 %. This means, for example, that with 95% certainty, the maximum daily oscillation of the market would be 49 points.

We continue without any signaling by the government that some day we will have a policy of price formation for the fuels. Without one, we see the sugar and ethanol sector deteriorating since it cannot obtain investments and sees an ever growing number of mills with a tight financial situation. It is of little use the fact that sugar has been paying the bills for the last few years if the ethanol, and especially the hydrated, has an average selling price that in the last 6 years has been below production costs 42% of the time.

With the tune of growth and investments that it experienced in the previous decade, the sector could be today in a position to crush at least 750 million tons of sugar cane and contemplate at least the construction of 32 new mills to attend an ever growing demand of a fleet of vehicles that more and more is geared towards flex engines.

Some of the “intellectually privileged” ones from the government will say with a conviction that only ignorance allows them to have, that if this was the case, the price of sugar in the international market would have been lower due to a sugar cane crop of that magnitude. The sector problem is not one of price, but the lack of a transparent price formation policy. The day we have one plus judicious safety as to how the ethanol price will be formed, the investments will come back the next day.

If the government were to create a rule establishing that gasoline prices to consumers would follow a monthly, bi-monthly or whatever average of international prices, in the following day we would see several companies displaying financial instruments that would reflect these values, enabling mills and producers to hedge their production, allocate their mix of production adequately and lock the returns for their companies efficiently. Now, to wait for someone in the current government to have the minimum management ability and understanding of these mechanisms and see how beneficial they would be to a sector essential to the energy policy of the country is to believe in druids, the Easter bunny, the unicorn, etc.

The seventh estimate of the Archer Consulting shows that between 12.2 and 14.2 million tons of sugar for the 2013/14 crop have already been fixed against the NY market at an average price of 19.32 cents per pound without polarization premium.