Sugar shows signs of fatigue
The sugar price in NY suffered a huge drop in future contracts with shorter maturities, showing that the funds took profits by liquidating part of the long positions and that – given the pressure also seen on the Oct/21-Mar/22 spread – the holders of the sugar long positions on the physical market have no interest in keeping the sugar (with no destination?) and should contribute to a huge delivery of the product when the October/2021 contract expires, which will happen in 3 weeks. Depending on the volume, the contamination of the quotations that expire next is inevitable.
October/2021 closed out the week at 18.84 cents per pound, a 78-point drop in a four-day week, shortened by Monday’s American holiday. A reduction of 17 dollars per ton was likewise followed by March/2022 (which closed out at 19.56 cents per pound) and by May/2022 (14-dollar-per-ton drop, closing out the week at 19.11 cents per pound).
The funds, according to the numbers published by the CFTC based on Tuesday, reduced the position by 7,150 lots, but after Friday’s drop, this number was surely much greater.
UNICA published the accumulated crushing in the Center-South up until September 1 – 392.6 million tons of sugarcane. Over the last five years, the accumulated over this period ended up representing 66.9% on average of all the crushed sugarcane in the respective year, ranging between 64 and 69%. If we use the historical average and assume that the cane loss this year will be around 8%, then it’s reasonable to think that the maximum production will be 540 million tons of sugar. It seems that’s what the final number should be.
There is no more influence of the crop numbers to be published by UNICA. The market has already absorbed and appraised a reduced sugarcane crop and even if this number plummets to 525 million tons of sugarcane, it’s unlikely that NY will pay much attention to it; it’s out there – the market has already absorbed it. In order to keep the market at higher levels, other stories will have to be told to maintain the bullish narrative. However, if the number improves by the end of the crop to – say – above 540 million of tons, then the adverse response might be greater. In our view, the market is starting to think.
Let’s not fool ourselves: the fundamentals of the market for the mid and long terms are positive as we have said here for many weeks. However, there is a clear dichotomy between what happens on the futures market, fed by the funds, because of the impossibility of new pricing on the part of the mills and the standstill – though subtly – on the part of the trading houses caused by the margin calls, and the reality of stagnation of the physical market.
Another point which will reverberate hugely over the next months is the acknowledgement that the Brazilian economy is skidding and should have a very small growth in 2022. The GDP forecasts for next year start being corrected to levels below 2%. We are living with the perspective of increasing inflation, water crisis, energy crisis, with a reasonable probability of power outages, high interest rates, total ineffectiveness of the federal government and an election year, whose result tends to be catastrophic. Therefore, the recovery of the domestic consumption be it of fuel (Otto cycle) or of food and drinks is bound to be put off.
On the other hand, Brazil has sent an additional 8.5 million tons of sugar abroad over the last twelve months in comparison to the same period last year, totaling 31.5 million tons of exports. India is getting ready to export another six million tons of sugar in the crop year starting next month. There will be no shortage of sugar on the planet.
In our opinion, the markets stressed in cents per pound and left little room for the high to go on at least until the end of the 2022/2023 crop. With the average price between the May/2022 until March/2023 contracts having come to 19.50 cents per pound, it would be pretty naïve of us to think that all the other sugar producers who compete with Brazil will keep looking and applauding the sun. At this level any country is capable of producing and exporting with margin.
Our recommendation for pricing in real per ton is based on simple data: the average price converted into real per ton applying the futures curve of the dollar comes to R$2,398 per FOB ton equivalent. Since January 2000 – therefore, for more than 21 years – when converting the daily sugar closings in NY into real per ton by the Central Bank rate and adjusting them by the inflation rate, in only 6.2% of the noted events was the adjusted price greater than R$2.398 per ton. For the 2023/2024 crop, the average value comes to R$2,316 per ton – a price that was greater by only 8.5%.
We understand that the potential for increase in cents per pound for 2022/2023 has already worn out. So, pricing in real per ton and buying an out-of-the-money call at an exercise price above the level of market fixation might not be as valuable a strategy as it was some weeks/months ago.
As for 2023/2024, we still see some potential for appreciation in cents per pound especially due to what is still ahead for us, such as the Indian ethanol program which should wipe out sugar availability in 2-3 years and the stagnation of the sector which will continue producing the same amount of sucrose in light of an increasing potential for sugar consumption over the next years and the consumption recovery of domestic fuel.
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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
