QUESTIONABLE OPTIMISM
For those with experience studying the sugar market and other commodities with a critical, objective and focused perspective, the trends and signals come out clearly many times. These observers are dedicated to a thorough analysis of the market fundamentals, considering the warnings coming out of the field and avoiding being influenced by impulsive feelings. Such approach leads to a more informed and reliable decision-making process. However, what seems to be evident to some can actually be a surprise to others.
In order to understand the scenario that contrasts to the logic I’m referring to, that is, people who believe in a price increase, look into the numbers supplied by UNICA about sugarcane production in the current crop and evaluate if there is some real sign of an imminent shortage. Be sure to observe the weather reports to verify the presence of the El Niño phenomenon. You won’t find anything, right?
As for the market trends, it (the market) has shown an impressive resistance to overcoming certain price levels. Specifically, it has been facing obstacles to overcome the 24-cent-per-pound barrier in the current crop, the 23 cents per pound for the 2024/2025 crop and the 20 cents for the subsequent crop. These points have been firm and consistent barriers.
The answer is clearly outlined: the market closed out Friday with the October/2023 contract below the 24.00, coming precisely to 23.80 cents per pound, which totals a weekly drop of 53 points, equivalent to almost 12 dollars per ton.
The March/2024 contract also closed at a fall of 47 points, or a little more than 10 dollars per ton. The futures contracts for the 2024/2025 crop of the Center-South ended at a closing average of 22.07 cents per pound, and the 2025/2026 crop at 19.39 cents per pound.
An important aspect to be pointed out is the 100-dollar-per-ton difference between the 2023/2024 and 2025/2026 crops. This information is paramount for those who ponder about the ideal moment to fix sales, especially as far as the 2024/2025 crop is concerned, since the 2025/2026 crop can still be considered too far for decisions to be made without adequate hedging (sale in real per ton coupled with an out-of-the-money call purchase).
Going back to the short-term scenario, we have seen an interesting situation in the spread between October/2023 and March/2024. This spread already shows a carry, which occurs when the price of the shortest month is below the price of the longest month, even when this difference is relatively small (less than 3% per year). This trend signals that the market forecasts greater product availability than what was foreseen earlier.
Let’s also consider the spread between March and May/2024. You can remember our previous discussion here when it was being traded at 150 points and our claim that this level wouldn’t hold out unless there was a drastic shift in supply and demand. Well, the spread closed out last Friday at 116 points, reducing by 7.50 dollars per ton. And it will get narrower.
Every person, or maybe every dreamer, sticks to a narrative that best suits them. In corporate life, the line between “believing” and “needing to believe” is so thin that it could be cut with a dull knife. There’s news about companies that hope sugar prices will go up until the end of the year, coming to 30 cents per pound. In New York, in May, during the Sugar Dinner week, some optimists even bet on 24 cents! Then you ask yourself: has making cannabis legal in the city had any side effect on the analysts? And watch out dear readers, I mean cannabis, not “repeated sugarcane”. The latter, unlike certain forecasts, will certainly be present in the next crop.
But let’s talk about the eternal optimists, those fervent believers that believe in a glorious return of the sugar in NY to the old and good levels of 30 cents per pound. Oh, this possibility exists, but only if the climate Gods are in a bad mood. Betting on the recovery of the market without a phenomenon such as El Niño being the protagonist is like giving an all-in at a poker game with a pair of twos in hand. It’s true that sometimes people win with a pair of twos, but if you sit down at this poker table where the sugar market is changing and doesn’t identify who is the “duck” at your table, be careful. You might be the duck.
The speculative funds keep settling their long positions, gradually moving away from sugar. In my view, they are only waiting on a trigger coming from the energy market to exchange sugar purchases for energy commodities which have been the ones that have bled the most in the accumulated over the last twelve months and, theoretically, the ones that would have the greatest potential to a high trend. Over the week, the funds settled more than 19,000 lots, but they still have 114,000 to sell. Check it out…
The mills, according to our second sugar fixing estimate for the 2024/2025 crop, with the consolidated data until July 31, 2023, a total volume of 6.24 million tons of export sugar is fixed, with an average price of 20.88 cents per pound. This figure corresponds to R$2,432 per equivalent FOB Santos ton, an amount that includes the polarization premium. This total volume corresponds to about 24.0% of the next crop. Honestly, I thought that the model would add up to a greater number. Oh, the models…
For comparative purposes, it’s relevant to point out that on July 31 of the previous year, the fixation of the 2023/2024 crop was at 27.5%. Simultaneously, the average value of fixations pointed to 17.55 cents per pound, which would amount to R$2,240 per FOB ton, already taking into account the polarization premium.
The real devalued against the dollar. It closed out the week at R$4.9703, retracting 1.43% against last Friday. Just the usual erosion of the macro scenario, the endless uncertainty about the tax framework, and the strategic exit of foreigners from the stock exchange, which brought about twelve consecutive days of fall – a nostalgic record we hadn’t seen since 1968. But let’s be optimistic: the accumulated fall has been smaller than 6%.
And speaking of optimism, remember the golden rule: never fall in love with a position. Money in the pocket never breaks any company.
You all have a nice 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
