The week started out with an extremely deteriorated macroeconomic scenario following the recrudescence of the Chinese economy causing a massive liquidation of the global financial assets, of the energy market and of the commodities, sugar being one of them, which traded at the contracts’ lows. What seemed to be the end of the times, the apocalypse, ended up being postponed. The market reacted and in the accumulated value of the week the commodities had a good performance, with oil going up almost 12%, sugar about 5% and grains 1-2%. It remains to be seen whether the reaction has come to stay or it is just a correction to what had fallen way too much?
The sugar futures market in NY closed Friday for October/2015 at 10.97 cents per pound, a 12-dollar appreciation per ton in the week. But what surprised the market the most was the premature narrowing of the October/March spread mentioned here so many times because of its incredible carry rate, which came to trade at 160 points just two months ago, driving the updated rate down to 23% comparatively to 28% traded a week ago. Premature narrowing because it would usually happen at the beginning of the trading month, that is, within one or two weeks. So we wonder why it has happened now.
The market must have realized that the real curve throughout 2016, reflecting the devaluation of the currency on the spot market along with the financial carry, makes the traded values on the sugar price curve in NY, converted into real, become extremely advantageous for the well-capitalized mills. The spread, as wide as 160 points, encouraged the sales hedge placement for March. This volume will be missed in October when the funds that are sold this month start the rollover for March. Its counterpart (the commercial ones) has nothing to sell there (since they made their sales in March), so the narrowing of the spread can occur more strongly. Those are just conjectures, conjectures…
A lot of mills with financial capacity, storage capacity and strategic vision noticed this some time ago and rolled over their hedges from October to March or just did it in March. They preferred to let the market carry its product until the end of the harvest, taking advantage of real and NY’s curve and settling a highly competitive value in real per ton. Only a very narrow spread will be able to encourage them to get out of this position and make sugar available earlier. My bet would be a 75-point spread from now on to bring the hedge from March to October.
Meanwhile, on the other side of the planet, the Asian trading company accountable for the last abundant sugar deliveries delivered on the futures contract of NY can repeat the strategy and become the owner of a strategic sugar stock for the off-season period in the Center-South with all the uncertainties hovering over the 2016/2017 harvest. This isn’t a boys’ game.
However, exchange rate and macro scenario can pressure October’s quotes. For instance, puts open volume for October, whose maturity is on September 15 with exercise price close to the market, come to more than 42.000 lots. If these puts are not wanted by those who have sold them just to pocket time-value, the sale pressure on futures to correct the delta hedging can be disastrous.
Have we hit bottom as far as price is concerned? Maybe we haven’t yet. Yellow lights from the exchange rate and macro scenario will keep dazzling our eyes. Oil price below 35 dollars per barrel in gas-ethanol relation and last-minute fixations by mills that have credit restrictions on the part of the trading companies can distort October’s quotes. The puts case mentioned above also can.
Benjamin Grahem (1894-1976), naturalized-American English economist and no other than Warren Buffett’s guru, used to say that the (stock) market is manic-depressive and, therefore, goes overboard on highs and lows. (Commodities, sugar in particular) market might follow suit.
In the long run, by the way 2016/2017, we believe that the price curve will reflect a stagnant sugarcane production in the Center-South, more and more unable to meet the potential internal demand of fuel and the maintenance of a sugar consuming world market. That’s what we have been saying at lectures: should Brazil’s market share as a sugar supplier for the world market and taking for granted that the ethanol consumption by the Brazilian fleet of light vehicles will stay stagnant by 35% (today it is higher than that), in 2020 we will either have to count on at least another 100 million tons of new sugarcane production or import gas or corn ethanol.
This is just a small picture of what the incompetence of a mediocre government - without planning, direction or focus - can do to such an important sector as the sugar-alcohol. But that is another story.
Nice week.