A SWORD HANGING OVER THE MARKET
The sugar futures market in NY closed out the week with October/2024 at 19.20 cents per pound, a 94-point drop accumulated over the week, which corresponds to a little more than 20 dollars per ton. With the Brazilian real appreciating 1.25% against the dollar over the week, the sugar values in Brazilian real per ton suffered a sharp drop of R$125 per ton for the last two trading months of the 2024/2025 Center-South crop.
Recently, the market has failed to keep a significant high, influenced by the change in the positions of the funds, which went from short to long and then went back to the short positions and now, according to the COT (Commitment of Trades), published this Friday by the CFTC (Commodity of Futures Trading Commission), based on last Tuesday’s data, are slightly long by a little more than 6,500 lots again. If they are all over the place like that, just think about those who have bills to pay.
We have already commented here that the exchange fluctuation had a decisive impact on the NY drop, resulting in prices shrinking by 200 points. This is a point that is beyond the understanding of the funds because it is an exogenous factor that goes into sugar price formation due to the weight that the sale fixations on the part of Brazil have on the total volume traded in NY.
As an example, on July 2, the sugar price reached R$2,692, comparable to R$2,690 registered on April 1, while the exchange rate fluctuated from R$5.0543 to R$5.6777. Over this same period, the prices in New York dropped from 22.72 to 20.45 cents per pound. That is, the drop must almost integrally be attributable to the exchange rate devaluation.
In the Center-South, based on the numbers published by UNICA, the accumulated sugarcane production has reached a historical record, despite the consensus among the mill owners about a 25% reduction in the crushing volume for the last quarter of the crop. Even so, it’s estimated that the total sugarcane production should stay around 605 million tons, in line with what Archer Consulting had forecast.
As for the exchange rate, a factor that can support prices, the expectation is for a stronger Brazilian real, especially because a recent devaluation was contaminated by a series of internal and external factors that should dissipate over time. A strong argument is that the expectation for Brazil’s trade balance this year should come to R$79.2 billion, and the actual interest rate is still appealing. Besides, cuts in the American interest rates are expected, weakening the dollar and creating support for the commodities and, therefore, for sugar.
On the other hand, however, there are Brazilian fiscal concerns and the constant possibility of geopolitical instabilities, in addition to the potential impact of President Lula’s rhetoric, saying more than what he should, and the possible election of Donald Trump, which could bring instability to the markets, and the weakening of the emerging currencies – it hasn’t been easy to make decisions.
It’s worth noting that over the last five years, the average price of sugar in New York has been 18.04 cents per pound, with the third quartile in 20.31 cents per pound. That is, in just 25% of the times over the last 5 years, the price has been above 20.31 cents per pound. Curiously enough, the prices above 22.00 cents represented 17.7% of the time, above 24.00 cents, 11.6%, and above 26.00 cents, 5.9%. The COVID-19 pandemic had a significantly negative impact, worsening the price average.
The sword hanging over the market is that Brazil is still a leading exporter, flooding the global market with 36.5 million tons of sugar, a new record, over the last twelve months. Just over the first five months of the year, sugar exports have increased 62% compared to the same period of 2023, making it difficult for a price recovery. Exports in terms of value have also reached records, with four consecutive years of increasing prices.
As we have already commented in other opportunities, an analysis on the last 25 years reveals that the higher monthly average prices never occurred between April and July, with pressure on prices arising over the April/July period. In April, the price average in NY was 20.23 cents per pound, in May it was 18.82 cents, and in July it was 19.18 cents per pound. It’s the best period for final users to fix their purchases, even for the next two crops. We believe that the prices in cents per pound can improve 150 points for the 2025/2026 crop and 250 points for the 2026/2027 crop.
With high inventories, and according to some sources estimated at about 9 million tons of sugar, India can decide to export a little. In Thailand, the 2024/2025 crop, which starts in December, is estimated at between 100 and 110 million tons, with a sugar production of 10.8 million tons.
The bullish factors include the possible reduction of the Center-South crop to less than 600 million tons, the strengthening of the Brazilian real against the dollar, the entry of long funds (they have already been positioned; we have to wait to see if it will really happen), well-fixed mills that reduce the selling pressure, the recovery of world consumption in the long term, the reduction of the interest rate in Brazil and the recovery of the ethanol market.
On the other hand, the bearish factors encompass the record performance of the Center-South, unchanged interest rates in the USA affecting the consumption, record inventories of oil around the world, Chinese economic growth below what was expected, Trump’s reelection and geopolitical conflicts.
Marcelo Moreira, who helps us with the technical analysis, points out that “October/2024, as mentioned in last week’s comment, came up against intense resistance in all the main moving averages (9/50/100/200 days) conspiring against the market! October/2024 closed out on top of the major support of the moving average of the 50 days at 19.20 cents per pound. Losing this support, the next goals are now at 18.60 and 17.90 cents per pound. With the “stochastic” indicator pointing to “oversold market”, if October/2024 can “hold” itself above 19.20 cents per pound, then it should go for the next resistances at 19.97/20.13/20.47 and finally 20.61 cents per pound”.
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
