WAITING FOR EL NIÑO
The funds kept reducing their long positions, albeit partially. Over the week, based on the report published by the CFTC (Commodity Futures Trading Commission), based on last Tuesday’s position against the previous week, they sold 5,480 lots (equivalent to about 280,000 tons).
Though they still have a very relevant long position with more than 100,000 lots, it wouldn’t be reasonable to suppose that the funds will return to the sugar market, buying aggressively and driving it once again to stratospheric levels surrounded by artificiality that we saw late April, when the futures came to trade at 27.41 cents per pound.
For a hedge fund manager, it would make more sense to switch a winning position such as that of sugar – where the profit has been large – to a position in a commodity that shows a high profit potential.
Looking at the energy market, which has been lethargic for a long time now and that has accumulated sharp drops over these last twelve months, it seems to have greater chances of returns than a market (such as sugar now) which “is a has-been”, in the language of an experienced trader.
So, what can lead the sugar market back to those wonderful levels of 27 cents per pound that many mills didn’t fix because, of course, they believed it was going full steam ahead towards the 30 cents per pound or beyond?
The name of the game is climate, or better yet, the climate is the most powerful component of this equation. Other components are also important: a recovery of the Chinese economy (there is a feeling today that at 22 cents per pound, the Chinese will come into the market buying sugar) and the expectation on the part of some energy market analysts that oil can change price levels in 2024 due to the increase in demand. Curiously enough, Brent has gone beyond 80 dollars per barrel for the first time in the last two months.
Therefore, in short, on the side of the points that can push prices up, we have the climate, the recovery of the Chinese economy and the oil trading above 80 dollars per barrel. It might look like a lot to the bulls on duty. However, it’s on the other side of the table where things get tough.
It’s expected that the Center-South will have sugarcane crushing of more than 610 million tons. Some optimists believe that we will come close to 620 million tons. The question that is hovering over the market is whether the Central-South will be able to crush all this sugarcane. And it’s at this point that the bulls take the opportunity and say, “they won’t be able to crush and, therefore, this is bullish”. That’s baloney.
There’s top-quality sugarcane on the way while the yield surprises positively, that is, the mills will maximize sugar production. There will be close to 15 million tons of sugarcane left uncrushed in the field this year. And right there we have another problem.
The Center-South will certainly have a sugarcane crop for 2024, which combined with the adequate investment that was made in the sugarcane fields and due to the farming practices, next year promises more sugar. In addition, some mills have invested and are investing in sugar factory or in production capacity increase.
If the climate doesn’t bring any surprises and the Chinese economy continues with this distressing swing, the sugar market will move towards the 22-dollar-per-pound level that we forecast here before Christmas but that the selling pressure of the funds has shortened by six months. If it weren’t for the “wrong-footed” end consumers who jumped into covering their short positions before the market decided to reverse, we would certainly be close to 21-22 cents per pound today.
As a result, how to believe that the March/May 2024 spread can stay with 140 points of premium? Large crop, sugarcane left in the field to be crushed next crop, mills starting the 2024 crushing much earlier, who will pay in the March sugar 31 dollars per ton more than the May price?
Over the week, at least, the sugar futures market in NY closed out positive. October/2023 appreciated 76 points over the week, about 17 dollars per ton, closing out at 24.29 cents per pound. The next maturity, March/2024, closed out with 78 points high at 24.40 cents per pound. The corresponding contracts to the 2024/2023 crop of the Center-South (from May/2024 to March/2025) closed out 15 dollars per ton above last week’s level. The dollar closed out the week worth R$4.7904.
Summer in the Northern Hemisphere is synonymous with market with smaller volume. Little volume makes room for the algorithms and robots to scare the unwary. Always carry a first-aid kit. You might need it.
Archer Education is sponsoring on September 20 (Wednesday) and September 21 (Thursday), 2023 in Ribeirão Preto, the course Ethanol Marketing Intelligence on the Fuel Market, given by Tarcilo Rodrigues. This is the third edition of a course that has already become a benchmark in the sector due to the strategic view of all the ethanol marketing chain, from supply to service stations, detailing the major points of pricing, stocks and demand all through the supply chain. Contact priscilla@archereducation.com.br for further information.
You all have a nice 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
