Sugar: Questions And More Questions

The NY sugar market closed the week lower across the board but with greater pressure on the farther away months. Jul/13 hit the low of 16.52 cents per pound, its lowest value since July of 2010. The remaining months had drops between 18 and 40 points (4 and 8.80 dollars per ton).

The real currency devaluation in relation to the dollar changes the perspective of the support on the sugar price in the international market in the exact moment of the entry of the Center- South crop. That is, a stronger dollar fuels the fixations of the commercial sale contracts against NY due to a better liquidation in reals for the mills, whose budget are in this currency. Is this really the case? Well, the real reached its lowest level this week hitting 2.1400 – if we take the low traded in sugar this Friday (16.52) and convert it to cents of real per pound we get to 35.35, basically the same liquidation that we had at the beginning of the month when Jul/13 traded at 17.64 cents per pound and the dollar was at 2.0050. Why is that then if the market did not drop further?

In the lowest level recently traded (34.1425 cents of real per pound) and with an exchange rate at 2.1400, NY should have traded up to 15.95 and it closed at 16.57. Could it be that repurchases by the funds of 11,500 lots prevented the market from dropping further?

On the other hand, a stronger dollar means that the oil imports will be more expensive in reals, worsening the cash flow deficit that the Petrobras Co. suffers for having a price at the pump imposed by the government that is lower than it imports at. To minimize this situation, that oil estate company may increase or anticipate its purchase of ethanol.

Are there still a lot of fixations to be made against Jul/13? The model we use says that there are not. We should remember the following: with Jul/13 leaving the board this month, and imagining that only the sugars for shipment in Apr/May/Jun & Jul have been fixed, in other words admitting that the sum of all remaining months be zero, in the last 5 years one third of the Brazilian exports have been concentrated in these first 4 months. So we have at least 33.33 % fixed. If we concede that only 20 % of the remaining has been fixed, then the total fixed would be at least 46.67 %.

The number of open contracts for sugar in NY has reached the highest volume of the last 5 years (Jul/2008), arriving at a futures position of 905.960 contracts. The news is positive since contracts with good liquidity allow the creation of derivative instruments that serve as an alternate for hedging to all the market participants. After the 2008 crisis, the sugar, which had had a record open position of 1,113,000 lots, arrived at lowly 465,000 contracts at the end of September in 2011. A lot is due now to the new speculative money that has come to sugar with the funds arriving at a net position of 112,000 open lots.

The access to the Santos port continues to be chaotic. By the way, this situation is no different than almost all the infrastructure of the country, which only in the government’s mind is working well. With their rose-colored glasses vision, for Dilma and her troupe, all is good. But, going back to that port situation, last week the line of trucks in the highway that links Sao Paulo to the Santos port reached an incredible 50 kilometers. What is going to happen when sugar shipments begin to be part of this sad journey? There is at least 1 million tons of sugar in the terminals to be shipped via Santos in the next few days.

The open position for puts with an exercise price between 17 and 16 cents per pound for July (whose expiration is in 2 weeks) is at 60.000 lots. This can cause some turbulence in case the market makes new lows.

Sugar has taken the lead in terms of the commodity that has lost more value since the beginning of the year, at 15.1 %. It is followed by coffee with 11.7 %, wheat at 9.3 % and corn with 5.2 %. On the other side of the spectrum, is orange juice with a gain of over 27 % for the year, followed by soybeans with only a 7 % increase.

A well-known executive from the financial market, who manages a large book of financing to the sector, has been seen in the week gone by at the Coffee Dinner, an event that occurred in Sao Paulo last Tuesday. Could it be that situation is so dire in the sugar market that the respected manager decided to visit other people?

Have a nice week.