Sugar: An Endangered Species?

The NY sugar market closed the week lower across the board along the price curve, all they way to Mar/16. The drops were between 31 and 61 points, or 7 to 14 dollars per ton, with a greater loss seen on the nearby months.

Since Dec 31, 2012, the Jul/13 expiration month has lost 1/7 of its value. The Spread Oct/13 – Mar/14 has widened even further, to 92 points, showing that an annualized carrying cost for it is at 13.4%. What has worried traders is the fact that the physical market has few deals and there is no desire from the buyers/importers to initiate their process of buying and inventory replenishment.

Grim Mood
It has been a long time since we have seen an atmosphere in the sugar market with such a bad mood as we have currently. This was demonstrated during the Sugar Dinner week here in NY. The casual conversations did have an “end of the party” tone. All are looking downwards, the same direction the market has been going to. This is very similar to the atmosphere seen in the 2010 Sugar Dinner when the sugar prices melted then to 13 cents per pound. In that year, in only three months after the drop, the market would jump to 19.88 cents per pound.

In the sunnier part of the market, the Datagro seminar had speakers of very good quality. Several good presentations gave us a different vision from the one we are used to. One of them contemplated the possibility of a radical change of the mix of sugar to ethanol in a market that may continue to drop, which challenges the surplus of sugar in the global market. A trader had this number as being 4.4 million tons of sugar production reduction in the CS while the representative of the largest Brazilian producer mentioned more than 8 million tons. The truth is that the tendency beginning now is for a growing production of ethanol since the anhydrous today has a better return than sugar, followed by the hydrated.

Radical Change Coming?
Another very interesting seminar came from an economist with one of the main financing banks of the sector in Brazil. It was the vision of a person with a direct involvement showing the macro correlations and their influences in the commodities, especially sugar. There is a consensus that the volatility of the commodities is too low and some analysts think there may be a radical change in this scenario, bringing evidently more stamina to the market.

The funds have 115.000 lots sold at an average entry price that should be around 18.42 cents per pound. With the closing Friday, the average non-realized profit is at 34 dollars per ton. There is then around US$ 200 million profit to be realized on the table at this moment. There is no hurry to take this profit since there is no indication that prices may recover in the short term. At least this is what the funds think. Now for those who have seen this film before, they know that the adverse reactions to positions of this magnitude many times have a surprise ending.

Irrationality
There is a lot of irrationality in the market that is difficult to pinpoint. A reader who is a trader of a big house sent me a somber statement. He said “when I see guys around 25 years old with their MBA’s working for the funds and betting heavily on a given position, without rationality nor a long-term view, only enough until they get their end-of-year bonus, it worries me. They need to bet big and heavily in order to get their bonus. This worries me”. Unbelievable right? But this is not a lament of one who has been losing money, since it is not his case anyhow, but rather a comment to demonstrate the difficulty one has today to deal with fundamentals and rationality when other peoples’ money can be spent at will.

Where can we find the last remnant of the “Bovarius Sapiens”, a species of sugar trader perhaps already extinct, who believed in markets with ascending price trajectories? To whoever was here in NY, in order to find him they had to go to the Natural History Museum on the 81st street and try to locate him in the exhibits next to the Tasmanian Devil, the Mammoth and the likes. No one knows, no one has seen him. Some say this species was extinct by his own hands, a rare occasion in nature, since the market breached the 17 cents per pound and traded at 34 months lows (since Jul/10). Some others say he was devoured by a natural predator, the “Ursus Sapiens”, who by the way continues to get fatter and fatter.

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Have a good week.