Weak Hand
The sugar futures market in NY closed out Friday with March/2023 at 20.05 cents per pound, a 41-point appreciation against last week’s close. The futures contracts that make up the Center-South 2023/2024 crop all closed in a positive territory. The real also closed out the week at a less than 1% drop against the dollar – R$5.3750.
Over the last 30 days, sugar in NY has traded the low at 17.55 cents per pound (3 weeks ago) and the high at 20.48 cents per pound (last Wednesday). That is a 293-point fluctuation in just 14 sessions. This represents a fluctuation of almost 65 dollars per ton, improving the sugar prices for exports by about R$ 300-340 per ton. The mills were fast and did not fall asleep at the wheel, nor believed in Santa Claus. They did their homework, and it seems that the fixations have increased reasonably over the last 10 days. [We still have not arrived at the volume, but we believe it should be close to 55-60% of fixations for the 2023/2024 crop].
It should be noted that the last time we have seen such a fluctuation (293 points) in just 14 days and within the same contract was on February 23, 2021 (an 18.94 high and a 15.82 low). After reaching the maximum price, the market collapsed. For comparison, in the last 1,000 sugar sessions in NY, the fluctuation average over 14 days has been 140 points.
What can keep the market above the 20 cents per pound, though we do not believe in this possibility in view of the fundamentalist scenario that goes against this idea, is a devaluation of the real against the American currency together with an oil price increase on the global market, which would make the arbitrage between ethanol and sugar narrow. Today, hydrous is trading at discounts against the sugar screen in NY, especially with the premium which has been traded on the physical (shipment for December has sellers at H+90, but without buyers) even though the line-up at the Santos port has fallen.
The market has been more solid due to India – at least this is an interesting narrative. What needs to be analyzed is whether the much-heralded default of 400,000 tons would be enough to support such huge price hikes. Our view is that it would not!
Being the object of this default, which some doubt will come to this volume, sugar will not fail to reach the export market. So, there is some missing consistency in this narrative. Ah, so blame it on the line-up, some proclaim. Any book on commodities teaches that logistics bottlenecking makes the basis stronger. And that is what happened, but not anymore. The premiums paid for sugar for immediate shipment have decreased.
The irrefutable truth is that behind this huge increase of almost 300 points lie the funds whose long position according to the report by CFTC (Commodity Futures Trading Commission), based on last Tuesday’s position, has already gone beyond 131,000 lots, an 87,000-lot increase over the week. The funds are long by 6.6 million tons of sugar – that is the explanation.
The funds are the ones encouraging the sugar market and I found it hard that NY can stay at this level long, because the mills in Brazil are taking advantage of the good prices and fixing, India will also take advantage of them, of course, because the export parity is at 18.67 cents per pound and the logistics premium pushes that country’s export acceleration.
In our opinion, the funds are the weak hand of the market. They will need a lot of luck and deep pocket to keep prices at these levels. They will have to count on meaningful changes in the fundamentals that would cause a change in the risk perception of the participants: for example, shortage of rain in the sugarcane fields, delay in the start of the crushing for the next crop, prediction for a smaller-than-expected sugarcane crop, among other reasons.
The funds still have more than two months to keep this [artificially] bullish narrative that has everything to be dismantled by the strength of the fundamentals. Meanwhile, we cannot forget about how the world is doing right now. High inflation eating away at the buying power of the families, increasing interest rates curbing inventory building up and greedy exporters who will continue to take advantage of the profitable prices by fixing their contracts in NY.
Sounding like a broken record, what can fire up the sugar futures market even more is a possible logistics disruption (which would affect the basis first) in sugar, the oil market trading above 95 dollars per barrel, the real strongly devaluing against the American currency (especially if the president-elect keeps telling his lies) and if Petrobras holds on to its parity policy with the international price.
As we can see, the funds will need to chance upon a good dosage of goodwill.
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
