Change of Scenery
The sugar futures contract in NY for March/2022 closed out at a low for the third week in a row. This time around, at 18.79 cents per pound, the accumulated drop was 56 points (12.35 dollars per ton) against the previous week. A greater sales pressure from nearby until March/2023, which devalued 50 points on average, was seen. Thanks to a better rainfall rate the market feels that the next crop in the Center-South might be better than (or we should say not as bad as?) previously thought. So, it makes sense that the sale pressure on futures is an effect of this feeling.
The greatest loss in nominal terms was felt when we converted the NY closing into real per ton. The sugar market closed Friday at R$2,342 per ton, R$252 per ton lower than the spot quotation of November 17 – a drop of almost 10% on the price that could have been obtained at that moment. The industrial consumers are very happy because they have been able to make structured operations that aim to reduce the acquisition cost of raw material. They were hesitant to follow the recent high prices because they could see the weak consumption movement and they hit the bull’s eye.
It’s true that there aren’t available volumes to fix export sugars against March/2022 anymore because the mills have been fixed for a long time. However, the values correspondent to the 2022/2023 crop, that is, the futures contracts that run from May/2022 to March/2023 have lost R$100 per ton over the same period. That’s painful.
The important fact is that the funds have heavily reduced the long position they have: from 206,000 to 140,000. From this Tuesday to the previous one, the period taken in account by the CFTC, the market varied from 20.11 to 18.60 cents per pound.
66,000 lots were liquidated causing a 151-point drop. That is, for every 440 lots sold, the funds knocked down the market by 1 point. I don’t think it’s such a bad drop. The market absorbed the partial liquidation of the funds well. If they wanted to completely settle the position, does that mean that the sugar market could drop to 15.50 cents per pound? We’d better keep an eye out on that.
Looking at the fundamentals, the sugar market returning to levels of 20 cents per pound after the new coronavirus variant threw a bucket of ice water on the recovery of the global economy seems less likely. The commodities have been dealt a huge blow and, therefore, cautious trading companies will look to trade hand-to-mouth, without taking chances on aggressive decision-making on the physical market until we have an idea of the scope of this new variant. The slower activity on the physical affects business turnover and reduces purchasing rhythm, making the market weaker.
Oil on a downward trend on the world market temporarily undoes the feeling of recovery of gas consumption for the summer vacation period (next year) in the Northern Hemisphere as we have said here. The 100 dollars per barrel we mentioned as a possible goal is unlikely to happen. With this new scenario, the predisposition on the part of the mills to favor ethanol production at the start of the crop also gets hurt. The game can be changed. We will have to move the pieces on the board very carefully so as not to be thrown out of the game prematurely.
India is in full production with more than 400 mills in operation. Sugar production has reached 4.72 million tons until the end of November, a 10% growth against the same period last year. The country should export 7 million tons this year (October/2021 – September/2022). Up to now, 3.5 million tons have already been contracted and fixed between 20-21 cents per pound. At the current price level India has paralyzed its sales. They believe that negotiations for new amounts of sugar destined for exports will only take place when prices go back to the 20-per-pound level. I’m sorry to discourage our Indian readers, but given the recent changes in the scenario, this target is jeopardized.
Back to oil: Brent has dropped more than 15% in a month. In the yearly accumulated, however, the commodity shows a positive result. It’s hard to be optimistic. Petrobras can lower the gas price at the refinery by about R$0.35 per liter. It’s just a matter of days, in our opinion. Hydrous ethanol is trading at B3 (Brazilian Exchange) with discounts of 250 points against NY. See?
Finally, unless you believe in all that gibberish our nubivagant Minister of Economy says, the fact is that Brazil is doing pretty badly. The GDP is visibly melting while the economists say that we are technically in recession. Everybody knows next year will be pretty bad, with all the obstacles stemming from a country whose president is ergophobic to the highest level and that when he realizes that his second term will slip out of his hands, he can try all kinds of tricks to get votes he has lost since the start of his government.
And we still run the risk of electing a PT candidate and his gang. His ambitious project to destroy the country will continue. The gang leader dressed as a saint has said that in his government Petrobras won’t follow world market prices anymore. But we tax payers are the ones who will get stuck with paying for the bill.
So, the real will get beat up a lot and its devaluation will affect the sugar quotations in NY. Remember we have been saying that the purchase of a put at 16 cents per pound for July/2022 was a good thing. When we suggested insurance, the premium was worth 0.10 cents per pound. It has valued 250% already since then.
The average price of the daily closing of the sugar futures contract in NY in November reached 19.75 cents per pound, the greatest in the year, surpassing the average price of October – 19.62 cents per pound. Over the last 21 years, whenever the monthly average of November became the highest of the year, the contamination to December was immediate, closing out the year upward. However, over the last ten years the average price of December surpassed that of November only in two occasions (2015 and 2019). Let’s wait to see if the tendency holds up.
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
