The Moment of Truth: Will Sugar Cane Follow Coffee's Troubled Path?

After all the bad news already out and properly digested by the market, let us see what the reaction will be now with a more pessimistic picture (in terms of volume of sugar cane) in relation to the sugar cane crop in the Center-South. The more optimistic forecasts that circulated at the beginning of the year had 630 million tons of sugar cane but now they have been scaled down to 615 million.

The coffee market has experienced something similar. After having experienced the greatest drop in price among agricultural commodities last year, the lack of rains in the coffee producing regions in Brazil has increased the worry that the drought may make the coffee crop much lower than previously thought. Sugar cane seems to be following then the same direction, at least for now. The forecasts indicate that the 2014/15 crop may have a break in relation to the previous one (which stood at 595 million) and reach a level as low as 575 million.

A reduction of 35 million tons in relation to the initial expectations that the market had been working from, added to an additional 35 million tons that is the approximate figure needed for sugar cane destined to the increase of the flex vehicles fleet in Brazil this year, plus still the export volume of sugar additional (based on an global consumption growth of 2%) and the vegetative growth of the internal market, will then provoke a shortfall of 70 million tons for the next crop. Since we cannot change the law of supply and demand, this shortfall will translate to higher prices.

The rains observed during the week and the forecasts for more rain next few weeks are insufficient to undermine the effects of the drought, according to an analyst who spoke to Archer.

NY above 16 cents per pound plus dollar hovering around 2.4000 have provoked a rush towards fixations for those who had not done so by now or those who had additional sugar production at the end of the 2013/14 crop. The fact is that had we not had this substantial increase on the volume of fixation last few weeks (Archer will only run the model at the end of next week) the NY sugar market would have gone up with more stamina.

All of that explains why the sugar futures market in NY has closed the high sharply higher by 109 points for Mar/14, quoted at 16.72 cents per pound. The remaining months to Oct/16 also closed higher between 20 and 108 points, or 4 to 24 dollars per ton.

Volatility and prices are walking side by side. The danger now is for those who sold cheap options to begin to cover and energize the options even more. Looking back and reading several commentaries from some time ago we noticed that for several times it has been said here that the low volatility index was worrying for someone had to sell insurance (put or call options) and that it was as cheap as ever for one to protect himself against price variations. Now the moment of truth has arrived. How will the market behave in the weeks leading up to the beginning of the harvest?

The spreads have narrowed considerably in the week. The May/Jul and Jul/Oct narrowed between US$ 1.50 to US$ 2.20, a sign that whoever is long in the far away months has been anticipating purchases due to the fear of a smaller crop or a delay of the beginning of the crushing, or yet purely speculating.

In the accumulated of the year, coffee is the commodity that is increased the most (53.1 %) while sugar increased only 4 %. In the 12 months accumulated sugar still shoes a drop of 4.6 %. Could it be that the funds will change position again? In other words, will they leave the uncomfortable position of being naked shorts and go long instead? 2014 may turn out to be better than expected.

We have received several e-mails this week from people from the sector being supportive of the comments stated here last week by professor Marcos Fava Neves. It is good to know that there are good people in this country that unfortunately for one reason or another at times cannot express their opinions so as not to make any waves or cause harm to the companies they work at. Companies by the way that we received several supportive emails from.

Have a good week.