If US Political Scenario Worsens Price Of Commodities To Increase

While the US congress deals with the standstill of the union budget, the non-essentials services of their federal government have been temporarily suspended. If the US political scenario worsens the tendency will be for commodities to increase in price. In the last 30 days sugar has been leading, with a 12.6% increase. Wheat comes after with a little more than 6%.

The week in NY closed with the futures prices showing gains between 53 and 79 points (12 to 17 dollars per ton). Mar/14, now the first trading month, closed at 18.48 cents per pound, in a Friday with a volume ridiculously low (52000 lots), the lowest since the beginning of August.

The NY exchange, despite the low volume on Friday, had an eventful week with a record delivery against Oct/13, which expired last Monday, representing a notional value close to 575 million dollars, bigger than the GDP of Tonga in the Polynesia. A delivery of almost 1,500,000 tons (more than 90% of it being from Brazil) normally could be interpreted as a factor really bearish, in the old and worn argument that a physical delivery at the exchange is the last resort for the seller. In theory, he would only utilize the exchange to do this when there would be no better offers in the physical market. However, this is not always the case.

Having participated before directly in past deliveries, when I worked as an executive for a company from the sector, I know that there are other factors that justify this type of operation that not necessarily are related to or caused by the lack of a better market to receive the product. In the case of this particular delivery, the receiver (a trading company) has in its hands an opportunity to find the destination for this enormous volume of sugar in a moment when the export premium may increase and in that case add to the gains of a possibly well designed strategy with the spread Oct/Mar, which traded at 100 points of discount back in the second half of May/13. This buyer has a lot of time left.

In the worst case scenario, the receiver party may get to the conclusion that nothing really happened, but still it would be cheap due to the “zero cost option”. In other words, for the time he has to wait for the premiums to compensate for the operation that took place. Note that we are not talking about the market direction, but of premiums only. In the best case scenario, for the receiver, we would have an increase for the premium for sugar exports with a Jan/Feb shipment, which would pay with a good margin the cost to carry the sugar.

For the deliverer of this sugar, “a producer wearing a trader’s hat or a trading company wearing a producer’s hat” as someone from the trade observed, this delivery enables him to let go of sugar acquired from third parties and/or from its own production, moving the terminal which has a considerable competitive advantage which can be converted into profits, but this opens up a discussion seen in the market a couple of months ago, that some suppliers saw their request for wash-outs negated, due to the fact that ethanol was paying better, and now they face a big delivery of sugar against the exchange. Go figure it.

Besides these factors, deliveries of this magnitude are an excellent reason to double up on one’s whisky’s dose of a Friday evening happy hour. The observations fueled by the alcohol consumed make the daily trading activity in a tepid market acquire a touch of geniality. Cheers!

We do not know the funds position this week since the CFTC is currently closed due to the government shutdown in the US. Dilma may be happy with Obama now, since the NSA is also closed so Obama, as per Dilma’s fantasy, has no way to eavesdrop. But she was able to get even with him by blocking him from accessing her Facebook account.


The internal sales of anhydrous ethanol, from April to September, were 5.46 billion liters, projecting the total for the 2013/14 crop to be 10.47 billion liters. The production number as per Archer Consulting is 10.16 billion liters, which indicates that we may have a tight situation during the off-season. The anhydrous is already trading today at an equivalent of NY sugar plus a 15 point premium. The prices should experience an increase at the end of this year.

The first estimate by Archer Consulting for the price fixations by the mills for the 2014/15 shows that up to September 30th, 5.2 million tons of sugar have been fixed for the next crop at an average price of 17.41 cents per pound.

UNICA has reduced their estimate for the Center South crop to 587 million tons, with 34.2 million tons of sugar and 25.04 billion liters of ethanol. The Archer estimate, from September 2nd, is 578 million tons of sugar cane, with 33.1 million tons of sugar and 24.5 billion liters of ethanol.