World Sugar Market – Weekly Comment – Episode 19

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Gambling
The delivery of physical sugar against the expiration of October/2021 in NY last Thursday was non-event. Note, however, that a considerable volume of futures contracts (more than 50,000 lots) was exchanged between the parts (highlighted as EFP by the exchange) some days before the expiration, which ended up concealing the actual weight of the delivery we mentioned some weeks ago.

The question is whether the EFP will effectively result in the physical movement of more than 2.5 million tons of sugar or whether, as some sources suggest, a part of this volume would be a washed-out.

Anyway, the market became weaker – not just because of the lack of fresh news, but also reflecting the macro scenario especially affected by China with the EverGrande problems and the United States discussing the increase of the expenditure ceiling which, if not passed by the American Congress by October 18, can leave the Treasury without resources to pay the maturing bonds and go ahead with the operations that depend exclusively on government resources.

But how can talk about a weaker market if sugar closed out Friday with March/2022 – now the first contract – at 20.06 cents per pound, a 10-point high (2.20 dollars per ton) against last week? As an experienced trader rightly said, “The performance of the market on the last day of the quarter was just window dressing of the funds more appealing, that is, the market rose with little volume and with the robots artificially improving the quarterly result of the funds”. Let’s wait and see whether there will be consistency or not.

The March/2023 futures contract is trading at almost 9% discount against March/2022. And March/2024 is trading with a discount of almost 13% against March/2023. In my opinion, these discounts are overblown and the trend is that this difference will narrow. The sale of May 2023/July 2023 and July 2023/October 2023 seems to be appetizing.

September was a recovery month for the energy market, especially for fossil fuels. Brent contract hit 80 dollars per barrel for the first time in three years reflecting the recovery of the major economies of the planet and consequently the increase in the energy consumption. Over the month natural gas has gone up by 36% and oil by 10%. Grains and softs have been left aside, except for cotton, which has gone up by 14%.

It’s getting increasingly clear that gas price will continue rising domestically in Brazil while the oil foreign price signals a solid tendency of high and the real should continue devaluing against the dollar given the worsening of the fiscal and political crisis in the country on top of the contamination of the external scenario.

The volume of traded contracts at the NY Exchange (ICE) had a slight recovery in August, though it was a vacation month in the Northern Hemisphere, when the volume usually drops. NY traded 2.22 million, 11% above the 2 million traded over the previous month.

Our model found out that, based on the data of August 31, 8.3 million tons of sugar are fixed for the 2022/2023 crop at 15.37 cents per pound on average, without pol, equivalent to R$1,950 per ton FOB Santos, or R$0.8489 per pound, both including pol. Just remember that in late August last year the mills were fixed at 8.1 million tons of sugar for this current crop. This shows that the flow/speed of fixations seems to be better than expected.

The average cost of sugar production in the Center-South, based on a productivity of 72.5 tons of sugarcane per hectare and an ATR of 141.59 (last UNICA report), according to our model, is R$71.22 per 60kg-bag ex-mill, equivalent to a cost of about 13.00 cents per pound FOB Santos, without pol. We will have another year of good results for the mills. We just have to do our homework well.

Based on the last numbers released by UNICA, the crushing in the Center-South has reached 430.0 million tons of sugarcane. At this time of year, over the last five crops, the crushed volume up until the second week of September represented 74% of the total volume of that year. Adjusting to this crop and assuming an 8% drop, can we say that we will end the crop with a crushing of 536 million tons?
Let’s stay tuned.

What can back up the sugar market for 2022/2023? High oil prices (above 90 dollars per barrel) and India promoting more and more ethanol production and consequently sugarcane crop in Brazil below 550 million tons and the improvement of the macro scenario (China and the United States) to mention just a few things.

It was gambling – as old as humankind itself – that pushed mathematicians Pascal and Fermat to develop the laws of probability. Had it not been for a request for help in the letter that the professional player known as Knight Méré had sent to Pascal back in 1654, maybe the history of risk would have taken longer to take off.

Méré used to offer the villagers a bet where they had to roll an honest dice four times to avoid a 6, that is, if they didn’t get a 6 after four casts, they would win the bet. The chances in this case were favorable for the professional player. Later, however, Méré introduced a game with two dices and, assuming that with two dices the possible combinations go from 6 to 36, that is, six times more, the number of casts could also be six times more: 24. That was when he started losing money and decided to ask Pascal for advice to find out where he had gone wrong.

To explain the reasons for the loss, Pascal relied on Fermat’s help and they figured it out by using combinatorial techniques that we call Pascal’s triangle today, but that, in fact, Indians, Chinese and Persians had already known about for many years. Do you know what Pascal’s answer was?

Curiously enough, in 1979, Cox, Ross and Rubinstein created a binomial model for option pricing using Pascal’s triangle and the result obtained by the easily understood model is close to that obtained by the complicated model of Black and Scholes created four years before.

You all have a great 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

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