THE FASTEST DROP IN THE LAST TWELVE YEARS
Fulfilling the old prophecy that asserted that the fundamentals of the commodities market end up prevailing over the thoughtless noises and the delirious narratives, the sugar futures contract in NY closed out the week with the contract maturing in July/2023 at 24.43 cents per pound, a remarkable 200-point meltdown, equivalent to a drop of 44 dollars per ton over the week.
The futures contracts maturing in October/2023, March/2024 and May/2024 that depreciated 37, 32 and 23 dollars per ton in the weekly accumulated also succumbed to the avalanche. On average, the maturities that correspond to the Center-South 2023/2024 crop lost 110 reals per ton, while the 2024/2025 and 2025/2026 crops shrank 67 and 64 reals per ton, respectively.
In just three trading sessions the sugar futures market in NY shrank 235 points (26.48-24.13), a performance only similar to that of September, 2011. That is, the last time we had a drop this huge in the same contract within an interval of just four sessions was almost 12 years ago.
The spreads have also narrowed, demystifying the widespread thesis about sugar shortage and world deficit. The short-term curve has flattened and that occurs when the market wakes up and realizes that there is no product shortage. The contract expires next week. What will happen to prices if there is a huge physical delivery at the expiration? Take a deep breath.
What the daydreaming bulls didn’t expect was how robust this start of the crop is showing a large amount of sugarcane production along with high productivity. Archer Consulting had access to the list of sugarcane tonnage per hectare of more than 150 units and the published numbers are amazing. On average, we are looking at productivity 20% larger than that of last year with an increasing sugarcane volume.
And the funds now seem to be in a pretty uncomfortable position. According to the numbers published on Friday by the CFTC in the COT (Commitment of Traders), the funds have increased their long positions based on last Tuesday’s position. With the consistent settlement seen on Friday, it looks like they will keep on pressuring the market by selling their long positions.
The price curve of NY converted into real and adjusted by the inflation rate, based on Friday’s closing, pointed to an average price in May/2023 of R$2,966. The closing of July/2023 on Friday, though, produced R$2,679 per ton, that is, almost R$300 per ton below the average price of the previous month. R$300 per ton evaporated while you were trying to decide whether to make the hedge or not.
Our feeling is that the price level in NY might become comfortable again and even profitable in the fourth quintile, a position that comprises 80% of the prices traded over the last 23 years and represents 2,393 real per ton today. Given the average dollar estimate for March/May/2024, this level points to sugar at 21.00 cents per pound in NY. That is, the market has room to fall even further, especially if we look at the production cost of the countries that compete with Brazil. Therefore, unless some climate disaster or exogenous event occurs, we believe that NY can reach 22.00 cents per pound before Santa Claus comes through the chimney.
Since there is a limit to the production capacity of sugar, some mills are investing in the sugar plant with operation expected to start for the 2024/2025 crop. The high sugar prices (as long as they have done their homework and fixed prices for the next crop or used some financial protection tool) justify the investment and can be paid off in less than 2.5 years. Some mills believe the return will come in a shorter time.
Corn ethanol production is expanding and should take up part of the space left behind by sugarcane ethanol, opening the possibility for the mills to choose to expand/build a sugar plant and use the sugarcane for the product that carries the better profitability. And that will happen in a crop (the next one) that promises to be even better than the current on and will enjoy the benefit of better farming practices with the extraordinary drop in input price in addition to the carry-over sugarcane (estimated at 15 million tons today under the perspective of some mills not being able to crush all the available sugarcane).
The bottom line is that there will be a lot of sugar next year. Pay closer attention to the hedging policy and don’t fall in love for the position.
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
