World Sugar Market – Weekly Comment – Episode 45

Is it deterministic or stochastic

The sugar futures market in NY closed out the week showing huge strength fed basically by two strong rumors that ended up not coming true: first, there was some speculation on the market about the readjustment in gas price around R$0.83 per liter that Petrobras would practice at the refineries and, second, the severity of the cold weather that would affect producing areas with a devastating impact on the sugarcane field.

Based on the alarmist predictions I have been reading, I got the impression that I would end up running into a couple of penguins waddling hand in hand along Santos boardwalk. What matters to the market – and mainly to the non-index funds – is version and not fact. Version shakes up the market; it has charm. Facts are boring and are “just” facts.

So, holding on to version, the futures market in NY blew up and July/2022 closed out Friday at 19.98 cents per pound, an 81-point increase over the week (equivalent to almost 18 dollars per ton). The real appreciated against the dollar trading at R$4.8500 which, in practice, neutralized the NY rise in real per ton.

The funds, according to the COT (Commitment of Trades), based on last Tuesday’s positions were long by 129,127 lots, an increase of 36,791 contracts in the week.  You can see who is pushing the market up, can’t you?

In contrast to this thoughtless euphoria, the Indian government informed this Friday that it doesn’t want to ban sugar exports and plans to reach between 10 and 10.5 million tons of exported sugar, a volume that not even the most optimistic trader could think of, this season (which runs until the end of September). And the Indian official also said that in the 2022/2023 crop (starting in October this year), India will export at least 7.5 million tons of sugar.

Repeating the mantra, we have been using here for some weeks, there are several aspects that can make the market go toward any direction, but looking at the fundamentals dispassionately, the short term is more limited to a price reaction above 20 cents per pound than, for instance, from March/2023 on.

The crushing numbers of sugarcane and productivity to be released by UNICA in the next two or three fortnights will bring more visibility of the path the market might follow during this crop. Once the smaller crushing and productivity are confirmed, there will be discussions about how much sugar will be available (the excess of the 20 million tons already committed) and how tight ethanol availability will be. Pay close attention to these numbers!

Petrobras possible price adjustment, whose discrepancy is at R$ 1.0000 per liter at the refinery, would cause an impact of R$ 0.4000 per liter on gas price at the pump and could raise ethanol price at the refinery by about R$ 4.3000 per liter with taxes. If fully applied, the adjustment would raise the break-even point with sugar to 21.50 cents per pound in NY equivalent. Do you really think so?

If you drive a car from point A to point B, 100 kilometers far from each other, at a constant speed of 80 Km/hour in a straight line on a highway, you should arrive at your destination in one hour and fifteen minutes, with very little variation. We have the distance and the speed and in a purely deterministic process we know the simple result of the above equation: the time that takes to go from point A to point B. Astronomers know exactly when the next eclipse will happen based on the Earth and the Moon’s orbit because it is constant. This is the best example of a deterministic process.

However, even in a deterministic model we can have variables that will make the result more labyrinthine. Toll booths on the highway, a railroad crossing it, or rain, among other variables and more or less complex relationships, will be key to driving the answer away from one hour and fifteen minutes.

Unfortunately, the markets don’t work that way. We can analyze every number of events and complex variables that orbit our environment, invest millions of dollars in the design of a mathematical model that will give us the next sugar price with four accurate decimal digits, recruit the best minds of the market and even so we won’t be able to be 100% sure that the final result of this analysis is correct. The market isn’t deterministic; it lives under a stochastic process.

This randomness means that within the process we have a chain of random variables related to events (exogenous factors or factors related to the asset fundamentals) and time, whose results are unpredictable.

If you thought making commodities-related decisions was something easy, you’d better think again.

You all have a nice weekend.

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

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