NY Sugar Market Closes Week With A Drop

The futures Sugar market in NY closed the week at a drop between 13 and 42 points, with October/2014 trading at new lows (16.01 cents per pound) losing nearly 5 dollars per ton at the last sessions. The next maturity, March/2015, was the most pressured, losing 42 points in value during the week, a little over 9 dollars per ton. Rollover of funds (which are short) should be starting to position on sale for March. The March/May spread show a 10.5% cost of carry equivalent a year. The funds are short 54,500 lots, about 2.8 million tons of sugar equivalent.

The historical annualized market volatility for the past 25 days is at 15.74% while the one for the past 50 days beats 25.48%, for 100 days 24.70% and for 200 days 24.86%. It seems to me that the short-term market must be missing a good shakeup to align with the other volatilities. In what direction are the next 100 points going?

The fire at the Rumo terminal at the Santos port last Sunday was practically a non-event for the futures and physical market. A trader, discouraged by the market, overreacted when he said, “the sugar market is so slow that only a fire similar to that one which happened in California a few years ago could make the prices react”.

The market reacted strongly at the opening of Monday’s session reaching a 5.57% high against the previous day’s closing. Since 2012, that kind of high has taken place only twice – October 18, 2013 (when the market reached 6.11% against the previous day’s closing) and February 24, 2014 when it traded a 5.68%-high. And that’s it!!

Four things, separately or jointly, can push the market down under 16 cents per pound: the volume of puts between strikes of 16.00 and 17.50 cents per pound sold to finance the purchase of out-of-the-money calls; pressure from Thailand that deteriorates the Brazilian sugar premiums; the still pending estimated fixation volume against October/2014 which can be a little over 2 million tons (40,000 lots); the worsening of the economic indexes and the devaluation of the real against the dollar. Who on earth could have bet two or three months ago that today’s market would be at such a low level?

The recently released numbers by the National Petroleum Agency (ANP) show that the fuel consumption in the country in June 2014 was 4,398 billion liters, the lowest monthly consumption since last September. However, the accumulated for the last 12 months (July 2013 to June 2014) comes to 54.7 billion liters, a new record on annual bases, out of which 11.7 billion liters of hydrous (with an 18.68% increase against the same period last year), 10.7 billion liters of anhydrous (a 27.88% increase) and 32.3 billion liters of gasoline A (a 0.88% increase only). Ethanol, on the 12-month accumulated, accounted for 41.4% of all the fuel consumed in Brazil (Otto Cycle), the highest percentage since December 2011.

Over a year, the consumption growth in the country has gone up by 4.46 billion liters. The present rate shows that in order to meet this constant consumption pattern next year, the sugarcane harvest for 2015/2016 will have to grow at least 22 million tons, that is, a 3.75% increase in production just because of that.

The model developed by Archer Consulting points out that the mills are fixed on 76% of the 2014/2015 harvest at an average price of 17.72 cents per pound. It is estimated that there is still a 2.4 million-ton volume to be fixed against October 2014, with most of it having been rolled over until March 2015. The fixation value in reais per pound is 40.22, 0.25% lower than last month’s final value. The average dollar calculated by the mills is 2.2889.