MORE DOUBTS THAN CERTAINTIES, MORE QUESTIONS THAN ANSWERS
The sugar futures market in NY closed out this Friday with October/2024 at 18.67 cents per pound, suffering an accumulated drop of 53 points (11.68 dollars per ton) over the week while the next maturity – March/2025 – closed out at 18.99 cents per pound with a 63-point drop (13.89 dollars per ton). Despite a weaker Brazilian real (see below), devaluing almost 3% over the week, sugar in Brazilian real per ton had a slight change for this crop.
Over the week there were events we can consider as black swans, but they didn’t create any mayhem for the markets of agricultural commodities – candidate Donald Trump’s assassination attempt and the world cyber outage of Microsoft and Crowdstrike clients, which cancelled flights, suspended surgeries, interrupted railway traffic among other problems. What kind of world are we living in?
On the sugar market, while the number of the Center-South crop converges towards a consensus of 600-605 million tons of sugarcane, the world balance of sugar supply and demand seems like a true enigma. Depending on who you ask, you can hear “a deficit of 5.5 million tons of sugar and even a surplus of 8 million tons”, according to the renowned expert Michael McDougall, from PGM. That way it gets much easier to plan, right? Might the intelligence market team have gone crazy?
Another recurrent confusion is about the number of India’s crop, which also seems to depend on the mood (or the trading book) of whomever you talk with. The second semester is doing a good job of creating more doubts than certainties.
Since December 2022, the sugar futures market in New York hadn’t registered such a low open interest. Currently, OI is 765,000 contracts. In order to understand how low this volume is, just compare it to the average of the last two years, which is 890,000 contracts. Over this period, the number of open contract has reached as many as 1,026,000 tops.
It’s worth noting that between 50% and 60% of the daily volume traded at the exchange is that of spreads. Spreads allow traders to use more complex and sophisticated strategies, taking advantage of the fluctuations related to prices among different maturity months, instead of depending on price direct movements. Since spreads don’t involve directional risk, but just the fluctuation between the two traded months, the volume tends to be greater. But the point is how come there is this volume reduction?
In 2023, the New York Exchange traded 36,975,000 sugar futures contracts, a volume only surpassed in 2020, when 38,580,00 contracts were traded. In 2024, up until the end of June, 17.7 million contracts had been traded, which represents a drop of 17% against the same period last year. The forecast is that 2024 will end up with a total of less than 31 million traded contracts.
Because Brazil is the greatest exporter of sugar in the world and, for the last twelve months, has flooded the global market with 36.5 million tons of sugar, it’s surprising that the volume of the futures traded has decreased. A possible explanation for this behavior is the absence of funds. On Friday, the CFTC (Commodity Futures Trading Commission) released that up until last Tuesday, the position of the funds was just 1,380 purchased lots, an extremely low number.
The truth is that the funds migrated to other soft commodities, such as cocoa, coffee and orange juice, which showed more appealing profit potential (read volatility) a long time ago. So, sugar has been relegated to the sidelines. As we mentioned here last week, the funds are currently without appetite for the sugar market.
We ourselves believe that the sugar minimum price this year has already been reached: 17.95 cents per pound traded on May 16. After that date, the market went up almost 300 points, bringing joy to the mills. However, the realization that Lula’s government isn’t doing the “homework” adequately as far as expenditure control and expense reduction are concerned is devaluing the Brazilian real against the dollar, which, in turn, is pressuring sugar prices down. The dollar closed out the week worth R$5.6059, still below the highest close of R$5.6777 on July 2.
Technically, according to our collaborator Marcelo Moreira, “the contract maturing in October/2024 closed the week with the stochastic indicator pointing to the market being “oversold” and it’s still on a downward trend. The next important support is at 17.89 cents per pound, while the resistances are at 19.17, 19.38, and 20 cents per pound. If the price breaks the 17.89 cent support, the next important supports will be at 17.49 and 16.60 cents per pound. For the contract maturing in July/202, the important support is at 17.79 cents per pound, with resistances at 18.50 and 19.17 cents per pound. If the price breaks the 17.79 cent support, the contract can test the levels of 16.27 and, finally, 15.56 cents per pound.”
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
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