Global Sugar View by McDougall – Episode 17

Why are funds buying?

The funds have really gotten the bit between their teeth with regards to sugar of late. The big increase in open interest on Monday (+20,574 lots) will most likely be followed by another big increase from yesterday. So what has gotten into them all of a sudden?

The press tries to search for a fundamental answer. Let’s look at the chatter.
1) Sugar to ethanol washouts:
Some 250-400K of sugar export cancellations are being talked about. However, this was the same talk that came out two to three weeks ago, not long after ethanol parity was peaking at close to 25 cents. Perhaps sugar week brought the news back into focus, but talking to a major group they aren’t seeing anything currently. Given that ethanol parity is now only 20.69, or less than one cent above the mkt, there is not a great deal of washout desire. This does not mean there won’t be a shift in the mix, but that will happen to the cane (sugar) not already committed. (For now)

2) Frost danger:
That seemed to spark some interest last Friday and certainly could have helped on Monday. However, frost has never hit in the month of May, and it seems there has been some moderation of the initial forecasts some services showed. Given it is Mother Nature we are talking about, there is some concern, but if we only see cold weather, which actually concentrates the sucrose in cane and thus boosts the ATR, we could see a selloff after this weekend.

3) Petrobras price hike:
As we saw from the mkt yesterday when the rumor of a change circulated, this hits closer to the truth. But President Bolsonaro appears to be pulling out the stops threatening to fire the CEO (again) and other directors of Petrobras, he wants to keep prices undervalued so it will boost his re-election chances. The problem is, that is only in October and he is already going “all-in” way early. JP Morgan indicated yesterday that fuel prices in the US could rise another 37% by August. What happens to Petrobras then? Debt increases and those in Petrobras remember the period between 2005-2011 when gasoline prices were frozen and Petrobras debt ballooned to $125 billion.

Funds like to compare commodities like they do stocks and some like to jump on commodities that are “distressed” or undervalued compared to their peers. Crude oil and energy prices have continued to rally strongly while sugar has worked in the same range since last August. So is sugar at 18.50 cheap? Some of the funds seem to think so as rising energy costs increase the cost of producing, processing and transporting commodities. We already see this in white refined sugar to some extent. Or at least for those sugar refineries that don’t have their own power source (bagasse for the cane linked refineries)

The elevated net gas price in Europe is one of the reasons the August/July white premium is trading at $115 a ton. Back in August when the market first broke 20 cents it was trading at $87.50. It has since risen 31%.

But it is not only energy that is influencing sugar, it is also other commodities like grains that can, after years, can finally compete with sugar for available land. This is not all encompassing in all countries but we do see it in Europe and the world’s largest producer (maybe second this year), Brazil. Soybean right now is much more profitable. How will mills try and hold on to cane? Price.

Some funds have come to the conclusion that sugar is “cheap” relative to other commodities so instead of piling more capital into corn, soy, wheat or cotton, they prefer to buy sugar and once the market rallies the excuses are sought after or the rally induces other stresses like margin stress or contract supply stress. A break above the 18.50-20.50 trading range would certainly ratchet up that stress.

So in conclusion, some sugar represents value. It can’t ignore energy, fertilizer, transport, labor, metals, and the rising price of other commodities. Now we are seeing more export bans. Whoever thought Indonesia would stop export of palm or India of wheat after talking of 10-15 MMT of exports and the need both countries have for foreign exchange? We won’t even talk about the weather. Frost in Brazil in May? Record heat in India? Fires in Nebraska? What other surprises will we see over the next six months?


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