August 9 to August 13, 2021
Recipe for an explosive market!
Take a hedge fund that shows off a robust long position of almost 250,000 lots, with an estimated unrealized profit of more than two billion dollars and, therefore, with no hurry to liquidate it. Add on a good dose of mills from the Center-South that for a long time have been totally fixed for the 2021/2022 crop and cannot take advantage of successive price hikes NY shows them. Next, add the trading houses that hold a huge volume of short lots and fear to be smothered by the constant margin calls. Add on the delta adjustments from trading with options that are at-the-money. Put everything into a hot oven and there you go – you have just created a perfect storm.
Now we have to create a narrative that gives everything that is happening a fundamentalist meaning because it’s not like us to speechlessly watch a market explode in our face without having a good and convincing explanation. It could be the number of crushing cane published by UNICA (as if this number was something new) or the realization that the drought and the frost has “really” killed the sugarcane field. Or we can say that the estimates by some trading companies that point to a crushing close to 520 million tons of sugarcane are the maximum expression of the irrefutable truth.
And let’s not spoil this well-built narrative by showing that the trading companies are asking mills to delay shipment, a clear demonstration that the physical market is weak. Or even say that the October/March spread opened to 52 points, which correspond to a discount of 6.4% per year, signaling that whoever holds sugar to be received in October wants to get rid of this embarrassment, because there is no destination for it right now.
Meanwhile, the NY Futures Exchange has increased by 20% the initial margin requirement to US$1,344 per contract which in theory could make the funds reduce the position, but it seems to me that the increase has had zero impact on future prices.
It’s an irrefutable fact that the sugar futures market in NY almost panicked watching buy stops being added over the last trading sessions, making October/2021 close out Friday at 20.10 cents per pound – the highest in the day – the highest sugar price registered since the session of February 24, 2017.
The sugarcane crop can reach 520 million tons, but it feels like that it is not what is pushing this market upward. The fear that there might not be any sugar availability while the spread shows a carry makes little sense. If the excuse is the next crop, there is still a lot to happen until then.
Having been in commodities for years and having experienced several situations makes us suspicious of price hikes not duly followed by fresh news about fundamentals. Look at what happened to coffee recently: the frost that hit the coffee fields brought panic to the futures market in NY. A month ago, coffee was being traded at 150.10 cents per pound, two weeks later because of the “devastating” frost, the market hit 215.20 cents per pound, a 43% hike which drained the cash flow of those who were short and brought panic to the market. Just a week after having reached the peak, coffee hit 171.60 melting 20%. That is, the true impact of the frost priced by the market after the turbulence was 20 cents, but up until then a lot of people died on the way. Coffee and sugarcane are found in many common areas affected by the drought and the frost. Can you believe that the impact on the sugarcane was or will be worse than that on the coffee field?
I did some research on the history of sugar in NY to find out if sometime in the past the market appreciated as strongly as the coffee market has over these last weeks, that is, 43% in just a week (for contracts with the same maturity) and I looked into what happened to prices after that.
It turns out that sugar has never had such a variation since 2000. The record occurred on January 27, 2006. On that day, March/2006 had traded at 18.61 cents per pound, 26.43% above the closing of two weeks earlier, which was at 14.72 cents per pound. March contract, in the following month, went back to the 15.70 cents per pound level. The export market was trading at an incredible discount of 70 points, worse than today’s discount. Anyway, it’s always good not to fall in love with the market because it will cheat on you sooner or later. Keep your eyes open!
You all have a good weekend.
Happy Independence Day to everyone in India!
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Mr. Arnaldo Luiz Correa is the Director at Archer Consulting. He is a Risk Manager with an experience of almost 30 years in the agriculture commodities market.
To get in touch with Mr. Arnaldo, write on arnaldo@archerconsulting.com.br
