World Sugar Market – Weekly Comment – Episode 25


Patting the elephant

A lot of smoke last week with sugar dropping and bouncing back at the NY exchange, which ended up closing Friday’s trading floor practically unchanged against the previous week, that is, March/2022 closed out at 20.01 cents per pound, seven insignificant upward points over the week followed by the other maturities that had a fairly similar performance.

The real appreciated by 1.5% against the dollar in the weekly accumulated, closing out at R$5.4600 and again reducing the values sugar obtained by R$36.00 per ton on average.

If you want to know why the sugar market in NY went up so strongly and then returned everything again, maybe you will find explanations seeing a fortune teller or renowned astrologer because the truth is nobody has the slightest idea why these fluctuations happen. I was glad to know I’m not alone in this (thanks Michael).

The market in NY has been slow and without much stamina. The total volume of traded contracts last month, for instance, was just 1.74 million units, 47% lower than that in September. The total volume of traded contracts in futures we have estimated for this year is 29.5 million units, the lowest since 2012. What is going on with NY?

One can think that the trading companies’ appetite in futures operations has been hindered by the slowdown occurred after the pandemic – whose impacts are still present – and the need to adjust the books (via spreads) has become less compelling. One can also speculate that the unusual mills’ advancement on the premature fixations of their sugar before the crop starts has deeply inflated the volume traded at the exchange in previous years.

Likewise, it’s assumed that the margin call related to the futures operations for pricing next year’s crop has been debilitating the cash flow of the trading companies. Our estimation is that more than US$3 billion in margin calls have been drained out of the companies’ safes including fixed and not yet shipped sugars of this current crop and the next one. These are just conjectures.

Markets whose business volumes dwindle are more susceptible to sharp price fluctuations and frenetic mood of the algorithms that sometimes send the market upward and sometimes send it downward. And the analysts of commodities themselves have to work out a way to insert a narrative that will make some sense to their readers.

Regardless of this short period where we try to figure out the market like the Indian story about the seven blind wise men, who would pat an elephant on different parts of the pachyderm and give their opinion on what they thought that was, that’s how the fools behave before the unknown. We just look at a part and we already want to express our opinions. But, as I was saying, despite that, the fundamentals of the market are still constructive in the medium and long term.

The behavior of the oil market and India’s attitude towards ethanol will play a larger role in the trajectory the market should take over the next months. The former has a great possibility of surpassing 100 dollars per barrel riding the wave of an incredible consumption next summer in the Northern Hemisphere. The latter when we see Indian states (Bihar) rushing to announce ethanol production at 17 units.

The just-in-time administration system that reduced costs and stocks has turned out to be nightmare for this moment of global economic activity recovery and has made many companies rethink about stocks and the efficiency of the system in unusual situations such as the ones we are living in. Will commodities be favorably contaminated by this change?

2022 will be a peculiar year in every sense, even more in Brazil with a fiscal crisis, political crisis and an election year that is promises a fright every day. The decision-making process will have countless elements, an intricate jigsaw puzzle of multiple pieces of different sizes and colors. The important thing is not to make the same mistake the Indian wise men did by patting the elephant.

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

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