The Skinny On Sugar

The NY sugar market closed the week with a small variation downwards on the first expiration month, Jul/13, quoted at 17.43 cents per pound, 10 points lower than the previous week’s closing. The remaining months from Oct/13 to May/16 closed lower less than 2 dollars per ton.

Tight Range
NY once more had a dull week with no news. In the last 30 days the market has oscillated only 107 points. It seems that it has been saving itself for the Sugar Week that begins this Monday, the 13th of May here in NY, with several cocktails, luncheons, dinners and seminars where bulls and bears will meet and socialize fueled by alcohol. Let us see what awaits us ahead. A recommended spread is to buy Tylenol and sell sugar.

Despite the anemic stance, and the little oscillations throughout the last few weeks (since Nov/12 the market has not had an oscillation in 20 days higher than 10% of the average closing of the period), there is now a smell of sulfur in the air. The market has been rehearsing a strong shake-up to either direction. Will we go below 17 cents or above 19 cents per pound?

Since the last Sugar Dinner in NY, last May, Jul/13, which traded at 21.77 cents per pound, has dropped 20%. Oct/13, which was then at 21.97 cents per pound, melted 19%. And May/15, which at the time was the last expiration month, dropped 10%, from 21.90 to 19.92 cents per pound. What a year!

High Spreads
We noted here five to six weeks ago that the cash and carry of some spreads showed a rate well above of what costs on average for the market to carry the sugar or any other commodity. Usually when this discrepancy exists the arbitrageur tend to buy the cheapest month and sell the more expensive one to do what they do best, to arbitrate. The thing is that the spread Oct/13 – Mar/14 shows a return of 12.8%, really high. If someone is willing to receiver sugar in Oct for 17.79 cents per pound and deliver it on Mar/14 receiving for it 18.70 per pound, they should certainly have carrying costs lower than what the exchange shows and will pocket the difference between the spread and the actual cost. But will this really materialize? It seems to be a good bet this buying of the spread. This is also valid for the spread Jul/Oct, which was signaling 10.5 % per year 5 to 6 weeks ago, and now is at 8.4 %. Whoever bet on it, made a few dollars.

During all the activities of the week, the funds reduced their positions by 12000 contracts, being now short to the tune of “only” 88000 lots (4.5 million tons). In liquidating part of their naked shorts, they elevated the price up to 17.90 cents per pound, which after that fell to 17.38 cents per pound. The mills took advantage and continued to fix their prices.

Next Year's Outlook
The average price for the NY curve for the months that coincide with the 2014/15 crop, May/14, Jul/14, Oct/14 and May/15, closed on average at 19.19 cents per pound. If a currency hedge is done for these positions, the net obtained today would be R$ 41.24 per bag ex-mill. Compare this to the production cost today estimated by Archer Consulting to be R$ 33..6348 ex-mill and we will see that next year will certainly be better than this one. The hydrated ethanol contract at the BM&F is almost in line with the cash market prices. Despite the apparent incentives by the government, the price of the hydrated has been dropping, although it is still being traded at a premium in relation to the export sugar VHP around 60 points over NY.

The eighth estimate by Archer Consulting indicated that by our model, up to May 1, 2013, the mills have fixed 14.94 million tons at an average price of 18.98 cents per pound. If we estimate that Brazil (and not only the Center South) should export around 26 million tons this means that 57.46 % of the 2013/14 crop sales have been fixed already.

Now the third estimate for the 2013/14 crop, published May 2 for the Archer Consulting clients, shows a sugar cane production of 580.32 million tons, being 35.604 million tons of sugar and 24.693 billion liters of ethanol. We reduced the sugar availability by 800 thousand tons and the ethanol by only 54 million liters due to a change in the mix more favorable to ethanol and also due to a reduction of the availability of sugar cane of more than 4.5 million tons and a lesser yield than previously noted.

To those coming to NY to attend the Sugar Dinner, have a good trip and good deals.