The Global Sugar Market

In a week where more than 1.000.000 futures contracts were traded, the NY sugar market closed Friday higher by 35 points in relation to last week’s closing, hitting 16.78 cents per pound for Jul/13. The last time we had a weekly volume of this magnitude was in February of 2011. In only six occasions since 1961 has the market traded more than 1 million contracts in a week, all of them after 2008. In only one out of these 6 times this volume indicated a lower market.

The crushing in the Center South reaches, as per the number published by Unica, a volume of 116 million crushed tons. The average percentage of crushing in the last five crops in the accumulated of the same period comparatively to the final production volume in the respective years was 18.67%. This way, the final volume of the 2013/14 crop would be 620 million tons. The market consensus points to 590 and the Archer number is 2% below this figure.

We note that the ethanol sales in the internal market have reached up to the beginning of the harvest 3.382 billion liters, a volume 3.5% greater than the average of the last five years in the same period. The total sales (including exports) are 2% above this average. By the last prices traded in the international market, both the anhydrous and the hydrated liquidate above the sugar in NY. However, the prices traded in the internal markets are above the international market between 120-180 points of premium equivalent NY sugar.

Calm Internal Market
On the other hand the internal sugar market remains calm, a result of the deceleration of the economy, orchestrated by the geniuses of Mantega and Dilma. When in December of last year the magazine “The Economist” called for Mantega’s head due to his unquestioned incompetence in the management of the Brazilian economy, it was said then that “the magazine’s impertinence will make him stronger”. In last week’s edition the same publication said ironically “We urge the president to stay with him by all means: he is such a success”.

After having traded in its lowest value in reals per pound in little over two years (on May 22), when the dollar currency still had not appreciated in relation to the real, if the weight of the devaluation had been passed in its totality to the prices, NY would have reached the 15.36 cents per pound mark. In other words, the market stayed bravely almost 100 points above this level. An executive from the market thinks the worst has been seen already and that prices should stabilize now. What corroborates with this idea is the fact that the mix of production pro-ethanol may zero the surplus of sugar in the world, diminishing the impact that it would have on prices already reflected in the bearish sentiment. To be verified.

Looks Like Profit Taking
The rally of the Friday, which for some does not have an explanation based on fundamentals, may only be profit taking by the funds, which are short at the average of 18.50 cents per pound and now begin to feel the itch in their hands to take their profits. According to some traders, their gains border 300 million dollars. What may also be a factor is the puts volume of 1650 sold against July, which expire next week. It stands at 20.000 lots. In other words, a bit of despair may have set in.

They say that the metaphor of the goat in the room comes from Russia during the communist regime. A head of the family with several children living in a tiny room went to complain to the party chief about the terrible conditions they were all facing living in that little space. The chief then promised to take care of the problem and ordered his workers to take a goat to the house of the complaining man in order for it to live with his family in the same room. The situation became hellish since besides soiling the whole place the goat smelled terribly. It was much worst now. Some days later the head of that family came back to the party office imploring that the goat be taken away. So they did that, to the relief of that poor man. Some more days passed and the party chief again called the man to ask how things were in his house. “Now that the goat has been taken away things are much better” he replied. The market has been so depressed, with the mill owners keeping their heads down, that when it rallies a measly 50 points the sensation is that the goat has been taken from the room.

Speculators In Control
As it was well said by a broker based in Switzerland in his recent commentary, the sugar market has been in the speculators hands, who control the futures in view of the absolute lack of news in the front. And we should stay this way. A lack of perspective, the real devaluing, funds increasing their naked shorts, a growing open position, volatility melting and other calamities. The high of the Friday may have been encouraging but it is still far to constitute a bona fide price recovery. Or could it be that the goat was taken from the room?

Have a good week