MR. IMPONDERABLE
After several pretty hectic weeks, the sugar futures market in NY closed out Friday at 26.20 cents per pound for July/2023, a small 12-point drop against the previous week. The same happened to the other maturities that stretch out until the futures contract for March/2026, showing small fluctuations between a 2.50 dollar per ton drop (the contracts with shorter maturities) and a high of a little more than 8 dollars per ton for those longer maturities.
According to the number released Friday by the CFTC (Commodity Futures Trading Commission), based on the previous Tuesday’s position, the funds just about repurchased the volume they had settled a week before. So, the funds are long by a total of 218,290 lots. The bulls are cheering.
We did some research on what had happened to the sugar futures market in NY ninety days after the highest sugar price had been traded every year over the period between 2000 and 2022. Curiously enough, over these 23 years of complete data, after the 90 days, the market dropped in 20 occasions and went up just in 3. And as for the tumble after the peak, it was 11% on average. The market peak so far has been 27.41 cents per pound; therefore, an 11% retraction would be a return to the 24.39 cents per pound level, where the market was at just 30 days ago – nothing to be astonished at.
Over the week, the sugar price in NY for the July/2023 contract converted into real reached R$3,043 per ton, a level that has only been surpassed (with prices adjusted by the inflation rate) in 1.3% of the sessions over the last 23 years. Those who fixed two months ago, but followed the guidelines to buy an out-of-the-money call option today would have a fixation (with the gain obtained from the market value of a purchased call) of approximately R$2,930 per ton. That is, the strategy achieved the goal of participating in the high trend.
During the sugar week in NY, I heard some mill executives admitting that if the company belonged to them, they would have advanced more on pricing, but this advancement depends on the approval of the Board. The perfect world is the one where the market stops negotiating until we decide what is best for the company.
Have you taken the time to see the curve of white sugar in London? August/2024 is trading with a discount of 10% against August/2023 and August/2025 is trading with a discount of 14% against August/2024. The bearers love that.
Brazil closed the 2022/2023 (April-March) exports loading a total of 27.73 million tons of sugar, a 7% increase against the same period last year. If we take the accumulated of 48 months to have an idea of how much we have put on the market over this cycle, we come close to 105 million tons, 1.3% below the record.
Professor and risk analyst Nassim Nicholas Taleb says models work until they stop working. Our NY price forecasting model that analyzes the data of a certain month over the last years (example: April/2000, April/2001, April/2002 and so forth) looking to predict the price to be practiced in the month following the analyzed one (May) estimates that the average price of this current month closes out at 21.47 cents per pound! The model does have good adherence between 0.85 and 0.95, being 1 the top value. Of course, unless Mr. Imponderable comes into play, nobody believes this price right now. But at least it can give us an idea of how distorted the market seems to be. Or it is the model?
The mills cannot complain. The average price they have obtained over the last 3 crops is 71.41 cents per pound in the 2021/2022 crop; 94.79 in the 2022/2023 crop and 99.15 in the 2023/2024 crop. Three good profitable crops that made the debt of the sector drop. Risk management is the name of the game.
In a possible growth scenario of sugar world consumption around 1.14% per year, in five years the world will need 10.8 million tons of additional sugar over this 5-year period and who will provide the world with this volume? The bulls are celebrating.
Look how cool this is. Sao Jose Mill will sponsor a soccer tournament on June 10 at the Pernambuco Arena, a stadium located in the metropolitan area of Recife and that held several games during the World Cup in Brazil. It will be the Ailton Sacramento Cup, a beautiful tribute to this great friend, loved by everyone on the sugar market here and abroad, who departed to the Eternal East at the end of last January. A big Vasco fan and good soccer player, Ailton would certainly be flattered by this deserved tribute.
You all have a nice weekend and Happy Mother’s Day, a word sweeter than our everyday sugar.
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
