Sugar Market: New Lows, Sentiment Is Bad

The NY sugar market made new lows this past week. Mar/14 closed Friday at 15.11 cents per pound after having reached 14.97 cents in the beginning of the week, the lowest print since June 10th 2010. In the month that it celebrates its 53rd year in the current format, the NY sugar futures contract (also known as contract 11) looks like it is barely alive. It reminds us of Lady Astor, the first woman elected to the British parliament and daughter in law of Waldorf Astor, whose hotel in NY hosts the sugar dinner. That lady woke up in her deathbed one day and seeing all her family surrounding her said “Am I dying today or is it my birthday?” Contrary to her, who ended up indeed passing away on that very same day, the sugar market is on a ventilator but it should survive. Let us keep praying.

The market sentiment is very bad among the traders. It has been a long time since we last saw so much apathy around. The lack of demand and the growing deterioration of the discounts are cause for concern. We have 50 points of discount for immediate shipment, which give us an idea of how bad it is. All the expiration months to Oct/16 closed lower in relation to last week, between 1 to 4 dollars per ton. In the year accumulated, sugar has lost more than 8% already, leading the commodities. The second worst performance to date is wheat.

Do you know what is the average closing in the first traded months in the NY sugar market in the past 10 years? Attention, I said 10 years. It is 16.07 cents per pound! In other words the market is already 100 points below its 10-year average closing. Scary, isn’t it? This has not happened since 2007.

Could it be that things are really as bad as they seem? Is there someone today willing to put more naked sales in their books at these current levels? The funds show more than 110000 lots sold. The mills have fixated approximately more than 35% of their export sales for the 2014/15 crop and should not have a lot more to put pressure in the first month (May/14). The 100 and 200-day averages are at 17.24 and 17.05 cents per pound. The funds are having fun trying to recover their losses when they went long at a high average (18.49 cents per pound) and could not exit their positions with a gain.

The average in reals per ton FOB in this crop is R$ 869.23. The minimum value we have seen is R$ 783.20. If the dollar goes to 2.5000 in order to reach the minimum equivalent we could then assume the lowest we could see this market go to would be 13.65 cents per pound. If this happens, the potential low is too limited for one to risk a naked sale. On the other hand, the Archer model shows us that the average production cost is approximately R$ 35 per bag ex-mill, which would give us 16.93 cents per pound FOB Santos with financial costs. With the discounts in today’s market then, sugar is showing a net negative margin of 13.53%, with the anhydrous and hydrated ethanol and sugar in the internal market showing positive margins. Therefore, there will be a priority given to the production of ethanol in the beginning of the 2014/15 crop.

Within normal conditions it is difficult for us to believe in a market above 17 cents for example. However, since the commodities market does not come with an instructions manual, one never knows. The line of nominated vessels to carry sugar is at 1.262.130 tons, according to information by Williams, out of which 712.000 are in Santos. Drastic changes in the sugar market, if they occur, will have to come due to logistical problems, delays in the harvest, rains or a combination of these factors. The bulls today are hard to find.

The prices for 2015/16, if combined with the dollar forward contract without the delivery of the currency (NDF), shows us an average of almost $ 44 per bag ex-mill equivalent, which represents a margin of 25% above production costs. The spreads May/Jul and Jul/Oct, both for this year, show us a carrying rate implied of 12% per year. It does not make sense to have spreads this wide (in spite of or due to the lack of demand). To the captive industrial consumers, it begins to make sense to anticipate purchases vis-à-vis the carrying costs. The spreads should narrow then.

There are strong rumors in the market that an executive of the financial sector has been demoted by his bank, due to pressure coming from Brasilia, because his positioning exposed in the media, against the government measures that affect adversely the sugar and ethanol sector. I hope it is just a rumor. But it should not be surprising to see the communists of the caviar and champagne to have this attitude. The exchange of ideas has left the government agenda a long time ago. That is why the sector has difficulty to find common ground. The problem are not the representatives from the sector that seek dialogue, but rather whom they have to converse with in the government. Their motto is “you either agree with us or else”. To discuss ideas, to present one’s opinion, they are a part of any dialogue in any economy of democratic countries. Dilma and her party however, like to censor ideas, making a debate with them an exercise for a Tibetan monk. The former senate member Fernando Gabeira summed up this problem well in a newspaper article last April. He said that “to dialogue with these people is the same as to play chess with a pigeon. It will step on the board, messing up all the pieces, leaving the game with its chest pumped up, proclaiming victory”.