Sugar: Quiet Waters, Then What?

The week ended with the Oct/13 NY sugar contract closing at 17.09 cents per pound, higher 30 points (6.60 dollars per ton). The remaining traded months closed higher as well, between 3 and 47 points (basically 7 to 10 dollars per ton). Same as last week, the highs were practically neutralized by the real currency appreciation. Therefore, in truth, in reals per ton, the market closed with a meager 7 reals per ton high, at R$ 895.00 (the average for the year is R$ 841.70).

The sugar market continues to navigate in calm waters, facing from time to time some stronger winds, but nothing that rocks the boat that much. The numbers do not lie. In the last 30 days the market has traded in a price interval really narrow – 107 points between the high and the low – the narrowest range since Jul/13. If we take the last 1000 sessions (equivalent to the last 4 years), and take a monthly average, we get to 378 points of oscillation, with the lowest at 75 points (in Mar/Apr of this year) and the highest at intimidating 977 points (Feb/Mar of 2010). This comparison is not totally fair since it speaks of absolute numbers, not relative ones. To speak of 977 points of oscillation with NY at 33 cents per pound is different if the market was at 20 cents per pound, for example.

In relative values, the current monthly oscillation (by the criteria of price range divided by the closing of the day) is around 6.25%, while in the 1000 days analyzed it has an average of 16.34%! How many times has the market oscillated, on a monthly basis, below the 6.25% in the last 1000 sessions? Only 43 times is the answer. And, out of these 43 times, how many have occurred in 2013? All of them. In other words, we have been in a really quiet market. I particularly see market as calm as this one with a certain prudence. One could say that the volume has been dropping and this has made the markets to be quiet and insipid. Not true. The volume of futures contracts being traded this year in NY is of 22.303 million, with a forecast of 32 million for the year. If this is to occur, we will have the highest volume in the history of the contract since its inception in 1961. Will these calm waters continue?

It is worth noting that the non-indexed funds are only 7000 lots short (only 350.000 tons of sugar equivalent). This means that in one week (from Tuesday to Tuesday) they have covered (repurchasing their naked shorts) to the tune of 64.000 lots. It is hard to tell, but this may mean that they are changing direction (from short to long) and/or that the market may go higher. But this deserves a more in-depth analysis.

Using the average of the Consecana for the current crop and the dollar close of this Friday, the Archer Consulting model calculates the production costs for sugar in the Center South to be R$ 34.7006 per bag ex-mill, without financial costs. This is equivalent to 15.79 cents per pound FOB Santos. A mill that has the approximate mix of this crop has an operational result (closing of Friday) at 3.40 dollars per ton of crushed sugar cane. The average financial expenses of the mills, say the analysts, is around R$ 15 per ton.

Whoever has not taken advantage of a stronger dollar now may be regretting not doing so. A month ago, the combination of the NY close with the dollar stood at R$ 798.48 per ton ex-mill. They should not despair, however. For the 2014/15 crop, considering the closings of this Friday and dollar term contracts with expirations equal to the traded months in NY, one can hedge at an equivalent of R$ 845.00 per ton ex-mill, at an average return of 20% above production costs. If there were no liquidity impediments, and more courage, for 2015/16 this return could go to 32.9%, or R$ 920 per ton ex-mill. The last time we had this kind of return was in Aug/12. Not too many people have heard of Grover Cleveland. He was the only US president to have two non-consecutive mandates. The first one was in 1885-1889 and the second one was in 1893-1897. He was a democrat who at times was commended by his republican opponents, who supported him in 1884 when he fought against political corruption. In his second mandate, the country experienced an economic depression (known as the panic of 1897) which made several banks go bankrupt due to unpaid large financing loans towards the building of railroads. Cleveland was not able to revert the crisis, but his reputation as an honest man of a high character remained intact. In one moment of the crisis, he coined a remarkable phrase. “In calm waters, every ship has a good captain”.