FUNDS SWITCH SUGAR TO COCOA ON A STRATEGIC ESCAPE
This was another downward week on the sugar futures market in NY. The May/2024 contract – since March/2024 expires next week – closed out Friday at 21.79 cents per pound, an accumulated drop of 80 points over the week, equivalent to almost 18 dollars per ton. The other trading months that run until October/2026 shrank 53 points on average – a little less than 12 dollars per ton.
A weaker real against the dollar this week wasn’t enough to make up for the sugar price drop in NY. So, the values in real per ton for the average of the Center-South 2024/2025 crop shrank almost R$70 per ton.
India is quietly producing more sugar than last year. The last numbers released by ISMA (Indian Sugar Mills Association), the major association of the Indian mills, show the country has produced 3.7 million tons of sugar so far – 4% above the same period last year. We will keep a close track of it. Though the market is working on the possibility that the country won’t export or import sugar this year, what would happen if there was a combination of Indian production above what is expected and a price drop on the energy market, which could slow down that country’s need to speed up its ethanol program?
Meanwhile, in Thailand, the estimates for sugar production have suffered a new drop and now point to 7.5 million tons, practically reducing the sugar production by 1/3 compared to the sugar production in the Center-South. That is, if the sugar mix for the 2024/2025 crop – as some analysts believe – is 51.5%, this increase of 2.5 percentage points ina volume of 600 million tons of sugarcane represents an additional production of 2 million tons of sugar.
The speculative funds settled a great part of their long positions in sugar. According to COT (Commitment of Trades), published this Friday by the CFTC, based on last Tuesday’s position, they reduced the position to just 10,800 long contracts. This is bad news, but why?
Well, in the current moment of sugar having so many uncertainties and pressure coming from the perception of a sugarcane crop close to 600 million tons in the Center-South, the deteriorated energy market, and corn that can end up in a greater production of corn ethanol, the only vulnerable point we have discussed would be if the funds decided to build a long position, because the fact that the mills are well-fixed (see below), they wouldn’t find anyone to give them support.
Our understanding is that the funds are letting sugar go because the cocoa market has a very high volatility. It’s a way to direct the portfolio towards where there is a greater and faster return. In fact, cocoa jumped 19% this week while coffee and sugar lost almost 3.5%. It’s reasonable to imagine that there is a portfolio adjustment going on that can go back to what it was as soon as the funds find a ceiling on the cocoa market. For now, it seems like this ceiling is far away.
Based on data found until Janeiro 31, 2024, the mills were fixed by 72% of the export volume, a total of 18.7 million tons of sugar at the average price of 22.20 cents per pound, equivalent to R$2,516 per FOB ton including the pol premium. In 2023, this percentage was 64%.
The volume of futures contracts traded in NY during December/2024 surpassed 3.45 million. In January there was a reduction of almost 1 million contracts. In spite of that, the strategies adopted by the mills, which included the acquisition of sale options (put) at lower prices than that of the market and the sale of purchase options (call) at higher prices, have proven to be effective. The volatility seen in December, with the market falling more than 600 points from the high, transformed several of these operations into effective sale hedges.
Analyst Marcelo Moreira’s, an Archer Consulting collaborator, technical analysis: after testing by three the important support of the moving average of the 50 days, May/2024 finally broke the support and closed out the week at 21.82 cents per pound. The next important support is 19.80 cents per pound and the resistances are at 21.90/22.40/22.70 and 23.60 cents per pound. July/2024 “on top” of the support of the moving average of the 50 days (21.63 cents per pound), trading at the low this week: 21.56. If this support is broken, it can go for the 19.70 cents per pound. Attention: over the short term the market continues on a downward trend! So, take cover!
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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
