Sugar: Half A Billion Dollars For May Delivery; That's Good, Right?

There is nothing like an over 1,900,000 ton-delivery (37,611 contracts) to cheer up the market, right? No. This is a historical record for the sugar contract in NY under the current format since 1961. When a delivery this huge happens, it is because the best buyer/best price is the exchange itself. Were it different, there wouldn’t be this huge a delivery. The exchange is always the seller’s last resource. And judging by the size of the ticket, one can see how discouraging the sugar market is.

Surely there are a combination of factors and strategies which explain such operations from the seller/deliverer’s standpoint: a competent spread negotiation, a trading book with compatible discounts, many trading companies must have sold short on the volume coming from the Center-South (almost 1.2 million tons). Those who deliver know that, by contract, the buyer can present the ship until 75 days after the expiration of the maturity month, that is, until July 15th. In terms of points, how much do the financial and storage costs represent for a 75-day period? Every trader has his own cost spreadsheet, but it is not difficult to set up something like 45 points of discount. Those who deliver believe this is the best deal they have at the moment. The result of this lethargy and anemia is to hold back on new deals and long-term contracts.

From the buyer/receiver’s standpoint, only an Asian leading trading company in the agribusiness world is a bet to supply/relocate his refining operations in Australia, New Zealand and Indonesia when sugar seems to be at a lower price level and with the possibility of redelivering the product at the next maturity.

The market might have two responses in the upcoming months. Less availability of final destinations which only the recipient trading company will try to fill up with the huge amount of sugar it will receive besides being able to set up the destination of this sugar for its refineries and tolling (industrial process to convert raw sugar into refined sugar). That is, on this bland market we find ourselves in, the spot can have higher discounts coming from those who still don’t have commercial contracts. The other side of the coin is that, should there be a delay in crushing due to unfavorable weather conditions, there might be some hedging pressure for those with short positions, the same positions that are assumed to have occurred in Center-South given the huge volume for delivery.

Last week we mentioned that the worst case scenario could be taking place: falling sugar with the Brazilian real strengthening against the dollar, representing fewer reals in the producer’s hands. With Friday’s closing, July/2015, which now becomes the first maturity closed at 12.91 cents per pound. Since the dollar for July must be around 3.0600, the FOB equivalent value is around R$890 per ton. Ethanol is liquidating better and should encourage the mills to divert more sugarcane to their production.

The sugar market practically continues its downturn trend, but I think because of exogenous reasons (oil going up 15% last month, for instance) the slope of the curve is less steep. NY’s limit, as we have said here again and again, must be the sugar FOB equivalent to R$850.00 per ton equivalent, something that today, with the dollar being at 3.013, puts July/2015 at 12.30 cents per pound.

The response to tax on gains in hedge operations presented in last week’s comment was huge, especially from other commodities’ readers who were caught off guard with the decree that comes into effect next July 1. One reader said he found it amazing that Minister Levy, a man from the market, knowledgeable about its rules and operation, can tax hedge operations whose essence does not focus on speculative gain but on protection, and has gone ahead with such an odd decree.

If our estimate is that R$100 million should be taken off the sugar market, the value all over Brazil, a commodity exporter and user of hedge tools, can go beyond R$1 billion. It is the productive sector that supports the country, and once again it gets this “gift” from the government. Take it easy folks – there are only 1,340 days to go before Brazil can get rid of Dilma.