LOST MARKET AND WITHOUT GPS
The sugar futures market in New York ended the week with the contract for March/2024 trading at 26.77 cents per pound. This value represents an appreciation of 29 points against the weekly accumulated, which is equivalent to an increase of US$6.39 per ton.
In the macroeconomic scenario there was a surprise with the job creation in the United States, which significantly surpassed the market expectations. This factor intensifies the probability of an increase in the American interest rates. Indirectly, this is a warning as to the futures monetary policies of the Central Bank of Brazil, especially when it comes to the possibility of a reduction in the basic interest rates of the Brazilian economy.
Consequently, the American dollar appreciated against the currencies of the emerging countries. In Brazil, the American currency closed out Friday at R$5.1476, registering a devaluation of 2.3% in the weekly accumulated after having reached the maximum quotation of R$5.2200.
It’s widely known that the expectation for an increase in the interest rates tend to have a negative pressure on the commodity prices. Higher interest rates can result in an increase in production costs, potential slowdown of the economic activity and delay in the stock replenishment. All these factors together have the potential of moving the market of commodities to a scenario of “cost and carry”. But there is nothing new in sugar.
In the specific case of sugar, there are dynamics that are acting on the market. According to Reuters information, the recipient of 2,759 million out of the 2,869 million tons of sugar delivered on the maturity of the October/2023 contract has already traded between 1.0 and 1.5 million tons of this total with China. To be seen in the future. This factor, together with the rain forecast in the producing areas of the Center-South of Brazil and possible crushing interruptions, has contributed to the appreciation of the sugar futures contract in New York at the end of Friday’s trading floor. It’s worth remembering that the contract even traded at 25.28 cents per pound last Wednesday.
In addition, the speculative funds, according to the expected, reduced 22,000 contracts, though they still have a robust position of 165,000 lots. The critical question being asked is whether these funds will choose to make profits over the short term or whether they will take back their long positions more vigorously. That’s a US$ 1 million question.
We have found that the daily close average for the sugar futures contract in New York in September reached 26.60 cents per pound, setting a new yearly peak. This average surpassed the previous record, which was 25.74 cents per pound registered in May. It’s interesting to note that this result in September doesn’t exactly come as a surprise, considering that over the last 24 years the greatest monthly average of daily closes has never occurred between April and July. That is, a peak in May isn’t usual.
The question now is if September represents the peak of the monthly average of the daily closes for the year or if there is still room for an upward trajectory of prices.
If we look at the price history of the XXI century, it’s remarkable that the greatest yearly average price has never been seen in a September. Instead, this number tends to occur between October and February. This pattern suggests that, according to the historical trend, there could still be room for an increase in the price average.
The bulls will find further reasons for optimism when considering that over the last 23 years in 20 occasions the average price of October surpassed the average price of September. The only exceptions were in 2001, 2008 and 2011.
The devaluation of the real has had a direct impact on the average price of sugar, with an increase of R$83 per ton for the average of the period of the 2024/2025 crop (from May/2024 to March/2025) and an appreciation of R$52 per ton for the subsequent crop. If we take into account a pricing strategy in which a mill fixed 25% of each futures contract and used NDF curve, the average fixation value for the 2024/2025 crop would be R$2,862 per FOB Santos ton. This price level has been reached in just 6.2% of the cases since January/2000.
Given this context, the recommendation for pricing can seem redundant, but its relevance cannot be underestimated. We are dealing with a scenario where the exchange volatility and the macroeconomic uncertainties, among other factors, can significantly impact the revenues and margins.
Wait for more bumps ahead; meanwhile, you all have a good 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
