Red Flag
The July/2022 sugar futures contract in NY expired on Thursday resulting in a physical delivery of a little over 500,000 tons of sugar. A producer receiving 115,000 tons, though it wasn’t necessarily a surprise for the market, drew some attention.
It’s said that the delay at the production units of the company and the need to direct the sugars produced to the contracts with clients of the domestic market motivated the company to supply a portion of its commitments with the foreign market via receipt of third parties’ sugar. There are other versions about the delivery, but since it’s the company itself that has access to its book, there is no way to confirm the accuracy of the information.
Actually, what can we say about the unbelievable drop in the open position on the sugar futures market? June closed out with 718,000 contracts, the smallest position since December/2017. The average of sugar open contracts in NY over the last 10 years has been 888,000 and the largest position (1,259,000 contracts) occurred in February/2020 before the pandemic while the smallest position was 683,000 contracts in October/2017. A market without volume reflects the anemia of the market and the lack of a future.
One can say that the amazing decrease in the long position of the non-index funds was the impacting event over the week. Covering the period from Tuesday to Tuesday, they liquidated almost 50,000 lots, leaving just 13,000, which must have been settled as of Wednesday. We will get back to this subject right down below.
The screw-ups caused by this government – just to mention this hell of a mess, I mean about the fuel – have as proof the proposal of a financial aid of R$3.8 billion to be reimbursed to the states in five monthly installments from August to December. The project overlooks July, that is, nobody has the slightest idea how the market will go about developing hydrous price. The most careful mills will stock up and wait.
The amateurism of the foolish ones in Brasilia is so ridiculous that it divides the abovementioned benefit among the states based on the consumption and not on the production of each one of them. That is, states that don’t have mills will receive part of this money and divide it between the producer and/or distributor. Producer states that consume much less than the half of what they produce will lose money when the proportionality is applied, like Mato Grosso, Mato Grosso do Sul and Goiás. It would be fairer if the credit were proportional to the production of each state. But we cannot forget the hydrous pricing is – broadly speaking – based on gas price which, in turn, is based on the world market and the exchange rate. That is, there is no telling whether we will have fuel prices changed again or not. Anything goes to get reelected.
Back to sugar, the week closed in red in NY. The contract expiring in October/2022, now the first trading month, closed out Friday’s session at 18.06 cents per pound, a 25-point drop against last week. The real, in turn, dropped 1.67% over the week and the dollar was worth R$5.3310 on Friday.
It’s worth giving a heads up to the fact that the funds have just about zeroed out their long positions. Maybe they will go short now and if that happens there will be further pressure on NY, which will count on the decrease in hydrous price in the arbitrage with sugar. What supports sugar is the fact that ethanol has the advantage of the CBIO, which today represents 100 points NY equivalent. However, things can get worse…
With the tax changes that have been introduced, gas should cost R$5.4800 at the gas stations soon. In order for ethanol to be competitive, its price should be R$3.8360 at the most, which represents R$3.1160 with ICMS ex-mill, that is, equivalent to NY sugar at 15.19 cents per pound. We have to add on the CBIO, bringing the break-even point to 16.25 cents per pound. Can we expect a 200-point drop?
I find that hard to believe because the mills are pretty fixed for this crop (I’d say about 85%). Sugar still depending on the fixation should be fixed against March/2023. All this tax rule will be back to where it was as of January 1. Are you confused?
This hostile business environment we are in reminded me of a sentence by one of these administration gurus: “The most practical decision-making isn’t about making the right choices; it’s about learning to deal with the uncertainty. The most common thing that prevents people from having the right answer is to hold on to their previous beliefs. Instead of instinctively rejecting new information, absorb what comes your way through an evaluation system of probabilities. Good positioning allows you to control your circumstances. Bad positioning allows your circumstances to control you. When you are forced to act based on circumstances, there is a chain reaction of choices that only gets worse and worse”.
If you haven’t heard about it, the Supreme Court in the United States has limited the control power of the Environmental Protection Agency to demand emission reduction. Thus, the country’s ability to fight climate changes is jeopardized and green investments, such as the ESG funds, for instance, lose importance.
Monday is a holiday in the United States, so the exchange will only open from Tuesday on.
Have a great weekend.
To read the previous episodes of World Sugar Market – Weekly Comment, click here
To get in touch with Mr. Arnaldo, write on arnaldo@archerconsulting.com.br
