When reason comes knocking at your door
The week was made shorter by Carnival in Brazil and the President’s Day holiday in the USA. And the business sessions at the NY Exchange swung based on news that abounded over the day. NY ended up closing out Friday’s session with March/2023, which expires next Tuesday, at 21.32 cents per pound, a small positive fluctuation of 9 points over the week, representing 2 dollars per ton. May/2023, which now is the contract with the greatest liquidity, closed out at 19.69 cents per pound, a negative fluctuation of 31 points over the week, almost seven dollars per ton.
Next week we will know what sugar volume (if any) Brazil will have as physical delivery on March expiration. What the market asks itself is whether with this pretty high March/May spread, there will actually be sugar delivery followed by an accommodation of prices or, on the contrary, whether if there is no sugar delivery, the market can interpret that as a worse availability of the product, perfectly fitting into the narrative of the specs, whose position we still don’t know how big it is. Ah, on Friday, the CFTC published the position of February 3rd. It is like reading an old magazine at a dentist’s office waiting room.
The survey made by the giant Canadian communications company Thomson Reuters which found out among the several market analysts that their forecast is sugar in NY will be at 18.37 cents per pound by the end of this year is very interesting. On the other hand, the brokers heard on the same survey bet on 19.75 cents per pound. To be seen.
It’s worth remembering that since 2000 we have seen that the highest monthly average price of the year occurred in the last quarter (October/November/December) of that specific year in ten opportunities. And, in seven out of these ten events, the highest average price of the following year occurred in the first quarter (January/February/March) of that year, with prices dropping next. In these seven occasions, at the end of the year, prices shrank 23% on average against the price of the start of the year. Based on this pattern, can NY at the end of the year get to 15.40 cents per pound? Calm down, but it’s a good idea to be reasonable.
A Cartesian thinking mill’s director believes that the dollar will hardly go beyond R$5.3000 over the next four years, “following the same path that made the Mexican peso”, which traded within a restricted price rangel for a long period. According to him, fixing sugar for the 2024/2025 crop starts making sense, because the amount of real on the futures curve inflated by the high interest rates will dwindle sometime. “Significant sale of commodities such as sugar, soybean, corn, cellulose, meat, ore and real high interest rate will bring the dollar down, even breaking the R$5.0000”, the executive ponders. I find the line of reasoning absolutely feasible and in line with what we have suggested here for a long time, which is fixing export sugar prices in real and, if applicable, as insurance, purchasing an out-of-the-money call option.
There is a huge effort to make us believe in a shortage of sugar. For instance, the narrative this week focused (while prices were going up) on the heavy rains in the producing areas of sugarcane according to which can hinder the start of the Center-South crop, strengthening the May/July spread and lighting up a warning light on hydrous availability. Believe what you want. However, the fact is that most mills we have talked to claim absolute normality. Others rule out delay, because they will start to crush in the first weeks of April. Someone needs you to believe this.
The Indian government is still bent on expanding the ethanol projects in that country. Nine projects have been approved recently, three of which are linked to sugarcane and five are focused on grains. The country should also reduce its production for this year. Consensus has it that the production should be around 34 million tons, with a downward bias. In our opinion, the smaller sugar production in India will be compensated for by the increase of sugar production in the Center-South, which can go beyond 37 million tons if the hydrous price on the domestic market continues pressured due to the tax exemption on fuels. Indian exports should go beyond 6 million tons of sugar. And in March, the government should decide if it will clear another tranche of sugar export.
Hydrous has reached its lowest discount against NY since October/2016. That is, never has the difference been so large. Some analysts understand that credit restriction and sky-high interest rates force mills to sell ethanol at any price and this jeopardizes sugar. The return of taxes on fuels is expected to happen as of March 1st. Because the current government is made up of people that are kind of lost, it can happen or not.
Next week, a lot of sugar traders from different parts of the world are getting together in Dubai to attend the already traditional Conference. The most experienced analysts say that whatever consensus comes out of this conference, the market responds the opposite way the next week. These are perorations that lack substance, but it’s worth monitoring them.
The board of the Conference was very creative this year attributing to the topics that will be discussed during the event names of Beatle songs that refer to the subject matter. For example, on the panel that will discuss the sugar market in 2023 and beyond, the suggestive name “The Long and Winding Road” and for the workshop that will be about strategies for risk management, they chose “Baby, You’re a Rich Man”. About this last one, in view of some suggested operations that have hovered over the market recently, maybe the most appropriate name for the panel would be “Help” or “Helter Skelter”. There will be no tribute to the youngest of the Beatles, George Harrison, who died in 2001 and would turn 80 now on February 25th, though.
A nice trip to those going to Dubai and a great weekend to everybody!
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
