World Sugar Market – Weekly Comment – Episode 23


Reviewing history so as not to make mistakes

At the start of the 2007/2008 crop, more exactly on June 13, 2007, the sugar futures market in NY was trading at the lowest price of the twelve previous months – 8.37 cents per pound. This price level represented for the mills a loss of about 60 dollars per ton compared to the production cost (cash cost) at that time: 10.43 cents per pound ex-mill – too inflated due to the overvalued real against the American dollar.

Over the period of a year sugar price on the foreign market had plummeted unbelievable 51.5% (from 17.25 to 8.37) bringing a panic and despair wave to the mills that insisted on holding for too long onto the fixations of sugar sales for export in hopes of better days that never came along. In today’s adjusted values by the IPCA (Broad Consumer Price Index), the mills inertly saw prices crumble from R$2,600 per ton to R$1,050 per ton within a year.

Behind the hope and stubbornness of the mills not to fix export sugars at the very good levels the market made available for them echoed – still fresh – the rant of famous gurus with all their splendid wisdom and fantastic predictions of eternal happiness that projected prices above 20 cents for the coming crop. At the Sugar Dinner in New York in May/2007, so a few weeks from the lower level, when prices were already alarmingly deteriorating, the same gurus were then hiding behind pilasters of the rooms at post-dinner cocktails.

The mills learned a hard and curious lesson. They realized that would have to drop the guessing method, which in ancient times was called witchcraft, which had no longer been the major prediction tool since 1654 when Pascal and Fermat introduced a systematic procedure of probability calculation of events. The discipline in treating the hedge and the providential resistance to not falling in love with the position used to work in 99.9% of the cases. The mills have changed risk management a lot since then. But, may justice be done, the gurus who predicted 20 cents per pound were just wrong about the timing. As a matter of fact, getting it right is always a matter of timing. Stopped clocks show the exact time twice a day.

About more than two years later – on August 7, 2009 – the sugar market finally reached 20 cents per pound for the first time since 1981. As for the price in real per ton on that day adjusted to today by the IPCA is equivalent to R$2,100 per ton. The mills corrected the past mistakes and reached a pricing that came to 65% compared to only 25% the previous year.

But prices kept on going up. At the end of 2009, sugar in NY reached 27.49 cents per pound, or 37% above August’s value. In adjusted values the difference was smaller: R$2,530 per ton, or a 20% high. Many mill owners wished they hadn’t fixed prices before. Does this story sound familiar, dear readers?

In 2010, the world sugar deficit, together with climate and logistic problems at the Santos port, made prices keep escalating and reach 34.77 cents per pound two days before the burst of champagne in celebration of the New Year. However – it never hurts to remember – on May 7 that year, coinciding with the Sugar Dinner in NY, prices tripped and got knocked out at 13 cents per pound! The gurus coming back from the dead like an upset phoenix predicted that “now” the market would reach 10 cents per pound. It never did. From that day on the market just kept going up.

What we can deduce when we compare past market situations is that we make a lot fewer mistakes every time we keep our focus and discipline. There is no methodology that can allow us to be right all the time, but we will substantially make fewer mistakes if we analyze the market fundamentals, the financial return for the shareholders, the values seen on the market compared to the history of the adjusted prices, among other indicators in the decision-making process.

For example, the average value of the NY closing (first trading month) from 2000 up to now has been 14.01 cents per pound. Although the value dispersion over the analyzed period is great, pointing to 4.65 and 35.27 cents per pound as a low and a high, respectively over the analyzed period of almost 22 years, was in just 17% of the events that the traded price in NY came to above 19.27 cents per pound – Friday’s closing value.

When this analysis is made in real per ton, with today’s adjusted values via the IPCA variation, we see a R$900 low and a R$3,045 high per ton, 2.2 times smaller than the dispersion in cents per pound. Friday’s closing value for March/2022 is R$2,480 per ton, outweighed over these almost 22 years by only 5.1% of the daily NY closings.

For the 2022/2023 and 2023/2024 crops, the right thing to do is analyze the obtained values via NDF (Non-Deliverable Forwards) built into present values minus the base interest rate of the economy (7.75% per year). Therefore, the values of the two crops are 2,386 and 2,154 real per ton, respectively. These values have been exceeded over the analyzed period by only 7.5% and 15.3%, respectively.

In short, the mills can even delay their pricing at the current levels. However, they need to acknowledge the risk they take waiting for better days. I believe prices in cents per pound might be slightly better for the 2022/2023 crop, although the exchange rate volatility will be much greater in 2022 and can distort the sugar curve in NY. As for the 2023/2024 crop, we still believe that the upward potential in prices in cents per pound should be at least 300 points.

To read the previous episodes of World Sugar Market – Weekly Comment, click here

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