THIS MARKET IS WRONG!
UNICA has announced the crushing volume for the first week of April: 15.8 million tons of sugarcane – a 14.4% advance against the same period last year. This number could be greater if it weren’t for the unfavorable climate conditions that kept several production units from starting crushing in the first days of April. Though making crop predictions way ahead of time can be risky – as shown by the early estimates of the last crop, which were way off – nowadays the market seems to agree about a crushing expectation of about 605 million tons of sugarcane for the 2024/2025 crop in the Center-South.
Of course, conventional wisdom suggests that market fundamentals should prevail over market players’ optimistic expectations. However, it seems that reality often prefers a more theatrical approach, contradicting forecasts with a certain degree of irony that baffles lots of professionals. As an experienced market executive said, with a smile, “Sometimes positions are built way before a well-founded analysis can be actually considered, ultimately resulting in a narrative effort to justify such choices”.
For instance, imagine a trader who, excited about some almost heroic optimism, takes on a long position. When the market, with its habitual indifference, heads towards an adverse direction, this trader gets stuck with the almost literary task of coming up with a narrative that justifies such misfortune. It’s a noteworthy spectacle, showing that even on the strictest markets, the art of justification after the fact is as appreciated a skill as the risk analysis itself. After all, these surprises happen to the best of us.
I know a story that goes back many years about a coffee trading company whose crop forecasts were thought to be extremely reliable by the market. Traditionally, this forecast was made public right after the closing of the New York exchange, foreseeing a possible bullish effect on the next trading day. Of course, the company had already put its bets on the purchase of futures and basis, aiming to capitalize on its own forecast. However, it was taken aback when it witnessed a significant drop in prices right at the opening of the market the next day. The dumbfounded traders exchanged looks that were a mix of disbelief and an omen of the disaster this turnaround would represent for the operational results. Then, at a moment of clear frustration, one of them blurted out, “This market is wrong”. The harsh reality, however, is that the market, with its implacable supply and demand logic, is seldom wrong. The bitter lesson to be taken in is that when there is an unbalance between expectations and market reality, the error is often on the assumptions of those who operate the market and not on the market forces.
This whole prelude is to say that the sugar futures market in NY, feeling the burden of the fundamentals, closed the fourth week in a row in a downward trend putting May/2024 at 19.42 cents per pound. In four weeks the accumulated drop comes to 310 points, no less than 68 dollars per ton that converted by the exchange rate represents a reduction of R$364 per ton.
The worst is still to come. According to the COT (Commitment of Trades), based on last Tuesday’s data, the funds have increased their long position to 34,450 lots. In addition, we saw the open position for May/2024, which expires next Tuesday, going up 606 lots, totaling 59,299 lots. Since we will still have two trading floors ahead of us, it’s reasonable to imagine that the delivery should be between 1.0 and 1.5 million tons of sugar. If the exchange is “the best buyer”, it shows how weak the physical is.
What can change this state of affairs? As far as the fundamentals go, climate issues that hinder crushing, smaller than expected crop (590 million tons, for example, would have a bullish impact), and, we cannot forget, at the current level below 20 cents per pound neither India nor Thailand would be willing to sell on the international market. Although this scribe tends to accept that India would export sugar after the elections in May, complying with a window until September 30, I believe that at these levels they are definitely out.
The upside is that the demand has come about with China and other destinations biting 1.8 million tons of sugar, while the ethanol consumption in Brazil has improved. The gas price gap administered by Petrobras with the interference of Lula’s misgovernment/government continues at 20% and who pays for this bill is the taxpayer who subsidizes cheap gas for the middle-income class.
According to analyst Marcelo Moreira, contributor to Archer Consulting, with the maturity of May/2024 futures contract next Tuesday the expectation of a great new delivery is pressuring the quotations again. The May/2024-July/2024 spread closed out the week still inverted by 31 points and the July/2024-October/2024 spread on “carry” by 9 points. The next July/2024 maturity once again closed out the week below all the major moving averages finding resistance now at 19.20/19.50/20.20/21.20/21.60 and finally at 22.60 cents per pound with an important support of 18.34 cents per pound. Now as for May/2025, there is an important support of 16.91 cents per pound and resistances at 18.96/19.14/19.68/20.60 cents per pound.
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
