Sugar Shows Zero Adrenaline

The sleepy and boring sugar futures market in NY closed the week slightly higher trading at 17.17 cents per pound for Oct/13, an 8-point increase. The remaining trading months, now to May/16, closed higher between 3 to 20 points (0.66 to 4.40 dollars per ton).

In the physical market, the discounts traded for immediate shipment to March of next year, have shown a structure of carrying of around 6.5% per year. Nothing unusual is happening. There is not the slightest worry in the market and the basis reflects that. The options volatility also shows this same sleepy pattern. A broker from NY said last week about the options being traded now at an implied volatility of 15.75% per year (!). I think we have not seen this since the 2005 Sugar Dinner. We have more adrenaline now watching Bambi than following this market. If you are looking for strong emotions, forget about it.

We have collected some interesting data. We calculated the monthly average of the daily closings for the first expiration month traded in the sugar futures contract in NY. This average presented a drop for five consecutive months since Mar/13, which was at 18.33 cents per pound. In Apr/13 we had 17.71 and after that drops to 17.08, 16.59 and 16.38 (for May, Jun and Jul). After that, it went up slightly for August, to 16.70 and in Sep up to now we have 16.84 cents per pound. Have we already seen the low of the year?

Another interesting data is that in the last 24 years, from the 1990/91 crop onwards, to be more precise, 87.5% of the lowest monthly averages of the respective crop years (May to April), have occurred between April and August. In only three occasions have we seen the low of the crop year occurring outside of this period, in Dec/92, Nov/96 and Feb/04. Will this trend continue?

In reals per ton, in a shorter period, covering only from the 2007/08 crop onward, in six out of the seven crops, the average price occurred with a concentration in the quarter Apr/May/Jun. Moreover, the average in this same period was R$ 792.47 per ton of sugar FOB Santos. Will the prices go up from now on?

With this same thinking, and taking into consideration that many economists now are estimating that the dollar should go back to the RS 2.10 level to the end of the year, due to the surprising decision of the FED to not begin tapering, the NY sugar market should appreciate, following the other commodities in general.

The average for the NY sugar close combined with the closing of the exchange rate by the Central Bank for the year is at 844.58 reals per ton. If the dollar returns to 2.10 this would be equivalent to NY trading at 17.53 on average. The high for the year was R$ 929 per ton, what would be equivalent to NY at 19.29 cents per pound. This is our best for the last quarter of the year. NY will be between 17.50 to 19.50 cents per pound. In other words, we have likely seen the low for the year.

If we consider the weather conditions that have made some mills stop crushing due to heavy rains and the ATR level well lower than expectations, we can add a few points to this price interval. These are the famous last words.

It is amusing and at the same time shameful to read news of the government wrestling every day with the questions of the increase on fuel prices. There will be an increase. No, there will not be one. One minister says yes. Another minister says no. And so it goes. It is worth noting that in the 90s, between 1994 and 1995, Dilma ventured as a business woman and set up a R$ 1.99 shop, well in vogue during those days. It would have been good for Brazil had she succeeded in that challenging venture. However, thanks to her uncontested managerial ability, after 1 year and 5 months she went bankrupt and blamed the dollar exchange for that (which at that time varied not a great deal). She will do the same with Petrobras.

Bloomberg is making available to its clients the commentaries of both sugar and coffee by Archer Consulting. You will have to key in ARCO.

Have a good week.