ALL GOOD THINGS MUST COME TO AN END
The sugar futures market in New York plummet at this Friday’s trading session, racking up a drop of more than 200 points over the week, under the astonished looks of incorrigible bulls and some absentminded ones who believed sugar would inexorably move toward 30 cents per pound. But, as reality reminds us, not always do the wishes of the “Horsemen of the Apocalypse” on duty or the brave souls of the speculative funds, which hoped to be but were not heroes of a possible high, come true. Sooner or later, the market fundamentals, the true masters of the game, emerge triumphantly over the human whims. So, the bill has finally come in, and it is steep.
To get an idea of the magnitude of the fall, March/2024 closed out at 25.08 cents per pound, melting 47 dollars per ton in the weekly accumulated that – adjusted by the real currency – represented a fall of R$250 per ton. The maturities corresponding to the 2024/2025 crop, from May/2024 to March/2025, decreased from 19 to 38 dollars per ton on average and lost R$142 per ton on average.
People from the pompous group called “Market Intelligence” must be squirming in their chairs to understand “why this stubborn market does not follow my orders?” Well, the market is like that all right, really stubborn. It was obvious that it would blow up to infinity and beyond. The sky was the limit, but now out of spite it decides to plummet more than 200 points over the week.
Ironies behind, we are sailing seas of paradoxes seldom witnessed on the commodities markets. According to the sacred manuals of these markets, whenever there is a hurdle, whatever it might be, when transferring goods from point A to point B, the typical adjustment of the books of the trading companies happens via buying the spread, which, in theory, should raise the prices on the futures market. However, in practice, the situation does not follow this simplistic logic. Price increase on the futures market does not occur at the same rate of the basis. And why is that? Well, for those who need the physical product, buying on the futures market is like trying to quench their thirst out of a mirage; it simply does not solve the actual problem, because the physical product is what really matters.
Therefore, when we face port restrictions or port congestions – situations that turn these places into actual maritime parking lots – an interesting phenomenon takes place: the basis gets stronger. That means that the buyer desperate for the physical product, maybe imagining their empty warehouses and the pressure for supply, is willing to pay a premium on the futures contract in order to avoid the nightmare of a shortage. Basically, it means paying more to be sure that the much-needed product will arrive in time, avoiding the chaos that there would be without it. In other words, it is a small price to pay for having what they need, when they need it, and getting some peace and quiet.
In theory, in order to be able to snatch up this premium paid by the buyer, the trading company can be more aggressive and pass this bonus on to the seller (the mills). However, on this side this did not happen. The mills did not get a single point. The fact is that the production surplus of sugar overloaded the warehouses, choked logistics and the mills that did not have commercial contracts with the trading companies or that found themselves with sugar surplus produced beyond the expected amount to be sold, had to do that with discounts above 200 points.
For the mills, selling sugar with a 200-point discount is a lot better than selling ethanol whose price trajectory depends on oil, which, in turn, does not get out of this restricted range of 75-80 dollars per barrel and seems not to have found the ground yet.
In a tapestry that looks to have been carefully woven over the last months, an almost theatrical scenario of product shortage is created. This maneuver has a clear goal: pressure the buyers who were late for their acquisitions to finally open their wallets. To add more spice to this story, there is the bottleneck scenario at the Santos port, a detail that conveniently justifies the increase in basis. Meanwhile, the mills, possibly discreetly smiling about the sugar profitability, embark on ambitions projects of new factories or expand the already existing ones. And the weather, just like a supporting actor in this drama, helps perfectly allowing the mills to process to the last sugarcane plant, in a frenetic race to extract as much sugar as possible.
Overseas, India is adamant about not exporting a single kilo of sugar. But, meanwhile, Bangladesh imports increase. A month ago, in our comment entitled “Bird Talk”, which I will repeat here for those who had better things to do, we said, “A pretty well-informed bird with its wings deep into the Indian sugar market whispered in my ear that we could be saying goodbye to the gold-priced sugar days soon. According to it, get ready to blink and see the price go down to 25 cents per pound faster than one can roll up a welcome rug. And it does not stop there: according to it, the conversations at the next Sugar Dinner in London will have a more bitter taste, with the price possibly falling to 23 cents per pound.”
All these loose pieces do not come together perfectly. That is why I brought the paradox up. We have situations that are usually thought of as bullish (uncovered consumers, congested ports, India off the market) and others thought of as bearish (extraordinary sugarcane production, new sugar factories, a perspective of next sugarcane crop similar to this current one, ethanol/oil with no strength to respond).
The non-index funds reduced their position to 166,000 contracts, a little more than 21,000. Since this figure refers to last Tuesday, it is evident that given the performance of the market this Friday, they have reduced even further (an experienced NY broker estimates it at between 40,000-50,000 lots). However, they are still pretty long. That is, has the market possibly reached the trigger price where the other funds might decide to blow up NY ever further?
The market has not given up more because the industrial consumers had GTC (Good Till Cancelled”) orders, usually used to take advantage of specific price movements over time. The domestic sugar market will be the next one to react dramatically, after all, a drop of R$250 per ton in New York in a week can make any trader have his heart in his throat.
From Monday on, get ready for a flood of traders hunting for a bid (purchase offer) for their sugar. But be careful. This collapse might just be a passing storm that will clear up the sky and soon drive the market toward the glorious level it belongs to. It will just take a buyer with a deep pocket for this endeavor or a turnaround in the fundamentals that is beyond our imagination right now.
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
