HISTORY REPEATS ITSELF AND SO DO THE MISTAKES.
The sugar futures market in NY tumbled in the week that closed out this Friday. July/2023, which also expired on the same day and resulted in a physical sugar delivery of a little more than 400,000 tons, collapsed 150 points in the weekly accumulated, equivalent to 33.29 dollars per ton.
At Friday’s trading session, however, NY recovered part of the loss seen over the last days and ended up closing out in a positive territory, with October/2023 closing at 22.82 dollars per ton. We understand that this recovery movement might partially have come from the purchase and pricing of industrial consumers who delayed appraising their inputs.
The movement of the spreads since the collapse started on June 20 and followed by eight negative trading sessions, when July was trading at 18 points of premium over October until the last days, might have triggered the settlement of strategies with the players pocketing the profits and rolling over possible delivery in July to a strategic placement for October, in case something surprising goes down in India or even around here.
Speaking of India, as soon as the sugar prices in NY collapsed, the GOI rushed to raise the possibility of India not exporting sugar next crop (which starts in October). That was a shot in the foot. As no one believed in this delusion, the sugar prices in NY dropped even further after the announcement. Such attitudes hurt the credibility of the institutions. Don’t forget that in the 2021/2022 crop India gave its word that its sugar exports wouldn’t go beyond 7 million tons and, according to the USDA (U.S. Department of Agriculture) it exported 11.9 million tons of sugar.
We warned you here that the trading companies would be a lot more selecting in the contracts for the 2024/2025 crop. Their cold sweat because of the gigantic margin calls and the refusal along with the delay on the part of the industrial consumers to fix their purchases at the high levels the market was trading at, which would calm down the margin calls, has caused changes in the commercial contracts for the next crop, slightly harsher for the mills. The reduction of the time-window of pricing and the interest charge on sugar advance are among the new cost for the mills. If people buy into it, great; otherwise, things will go back as they were before.
Petrobras reduced gas price at the refineries as of July 1. There was no gap between the international price and the price practiced by the company. It was the opposite: prices were 12% below those of the international market on average. But, under new management, the state-owned company chose to reduce probably anticipating the increase in gas price upon the return of the taxes – a way to neutralize price volatility. The company’s shares plummeted 5%. For the hydrous, that represents a hard blow and PT’s (Workers Party) government always being very nice to the sector.
We have discussed repeatedly here the urgent need to have within the company a risk policy drawn up and executed according to indexes that allow for unbiased decision making. There isn’t just one criterion to be followed, but a set of indexes that aim to add value for the shareholder. Risk policy (or hedging) ends up exercising discipline and reducing the impact of one getting on board with common fallacious narratives when the market gets into the panic mode.
For instance, some companies have set a minimum value in the cash flow dictated by a judicious budget carefully drawn up and would rather operate a fence, strategy that constitutes buying a put to guarantee the minimum value of the budget, combined with a sale of a call above the market to finance the structure. Better prices are given up on if the market explodes in exchange for the security of having what has been established in the budget.
Other companies use the EBIT and speed up their pricing proportionately to their progress of this index. A criterion I have a special preference to is to analyze the values in real per ton over time adjusted by the inflation rate and compare them to the present moment. Just recently (in late April) we saw NY trading above R$ 3,100 per FOB ton equivalent, at current prices, and warned that this value, in the last quarter of the century, will occur in 1.5% of all the events. How not to fix prices at these levels?
Of course, we can mess up on the strategy, but it’s preferable to make a mistake on the criterion than get it right without it, because by making a mistake we can redo the strategy and try to find the flaws in the adopted criterion, whereas when we get it right without criterion, all we can do is attribute it to luck or to the Gods.
On the last business day of May, sugar closing in NY was at R$ 2,924 per ton (adjusted to today). This week, July/2023 futures contract, got to trade at the equivalent of R$ 2,467 per ton. R$ 457 per ton slipped through the window in a month.
What still lies ahead? Last week, we said here that we would see 22 cents per pound before Christmas, but we were way off. The 22 cents came this week. A much more violent drop than what anyone could have imagined, though the fundamentals supported (and continue doing so) it. We believe that the reasonable support on the curve in real per ton over the long term adjusted by the inflation rate is about R$ 2,350 FOB equivalent. Based on the closing of the exchange rate at R$ 4.7885 on Friday, it would come to something around 21.50 cents per pound today.
But this is just an index. On the other hand, we have to analyze that the Brazilian crop is doing pretty well, the sugarcane yield is better than that of last year, some companies are investing to produce more sugar next year, the energy market continues disappointing, while ethanol is watching its margin dwindling. They’re too many negative things to support prices. However, the bulls got excited about the dead cat bounce, terminology created about 40 years ago by the stock market to define a small rising movement of prices after the market plummets. Let’s see whether sugar will meow or not.
You all 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
