ENDANGERED ANIMAL
A recent report published by the United Nations alerted to the polar bear being among the animals facing the greatest risk of extinction. If some UN agent had attended the Sugar Dinner last week here in NY, they would have found out that another species of bear also runs the risk of dying out. There are no more bears on the sugar market. They either have all vanished or are hibernating. As a great trader I had the privilege to meet in the past would say, “When everything looks bullish it is bearish”.
The logic of this brilliant trader (who has passed away) was that when all bullish news is reflected on the price, any small shift in the expectation of the participants can change the market’s mood. For example, if the weather is better than expected (El Nino) or if there is no interruption of crushing beyond the normal average in the Center-South, the market can take a little profit.
The funds have slightly reduced their long positions, but nothing that will change the participants’ views. Everybody is bullish like there is no tomorrow. At least it’s comforting to know that many mills are taking the opportunity of the market and fixing prices in real per ton or creating structures with options that add value, above the market peak, on a high trend. For May, I have seen mills being able to fix up to 150 points above the highs with these structures. Of course, everything has its risks, In this case, the risk was for the market to fall and there be no fixation. The goal is to take advantage of the euphoric environment and the buyers’ appetite – no market goes up indefinitely.
The compelling fact is that sugar is going the wrong way of the energy market, as paradoxical as that may sound. The market support – which recovered the loss of the start of the week this Friday – comes from the funds and from purchases triggered by computer and algorithms systems, which couldn’t care less for the fundamentals. It’s up to us, (poor) human beings, to introduce a fundamentalist narrative to justify this irrational behavior.
The sugar purchase by the Chinese when the market took profit early last week ended up supporting the bullish discourse. If China is buying, that means there will be a sugar shortage and that’s that.
The market can go up further, of course. It will go up to the point where those who need to cover themselves, be it on the physical or on the futures, stop the bleeding. Despite the recent stress on the cash flow of those who are short, no one was heard or seen squirming on the sidewalk – at least for now.
We must watch out for some aspects that can represent greater soundness and therefore more robust prices: a) the weather in the Center-South; b) the recovery of the energy market; c) the strengthening of the basis; d) the volatility of the calls. A possible worsening of a) and a substantial improvement of the other items are stamps in the passport for infinity and beyond, about which we talked about a few weeks ago; otherwise, get ready for a retraction.
To put it into perspective, in the yearly accumulated, sugar has appreciated 32%, losing only to orange juice at 33%. At the other end, natural gas, diesel and oil have gone through a fall of 53%, 30% and 12%, respectively.
I haven’t been to the Gala dinner, which isn’t as glamorous as it was years ago when the parties at the Waldorf Astoria suites were the highlight of the week. Conversations and businesses would flow and go on all night long when we would stagger back to the hotel with our tuxedo reeking of cigar smoke (yes, cigars were a must-have accessory back then). It looks like that the only thing that hasn’t changed is the menu and the service. An annoyed veteran told me that this has been the worst year of all times as far as the food, the service and the speech that took less than 5 minutes are concerned. Imagine if the market wasn’t way up there….
You all have a nice weekend and those returning to Brazil have a nice trip.
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
