World Sugar Market – Weekly Comment – Episode 54

A bunch of bare wires

The sugar market has been causing great physical exhaustion in its participants in charge of results due to so many changes in fuel taxes making the decision-making process difficult; changes in their sleep pattern for not being able to decide whether to price fixing or not, sell or not; difficulty relaxing because Brasília is a bad news mill; difficulty focusing because they don’t know whether oil will go up or down; tinnitus and dizziness because of the truly roller-coaster ride that has characterized this NY market; anxiety and depression – a collective neurasthenia.

This week was clear proof of this neurasthenic behavior. On Monday, NY hit 19.59 cents per pound putting that on shortage of product, increase in deficit, among others. On Friday, the market traded at 17.87 cents per pound, closing out at this level with a 138-point low against the previous week, more than 30 dollars per ton.

The real devalued 1.64% against the American dollar and closed out the week at R$5.4987. The equivalent prices in real shrank R$128 per ton for the 2022/2023 crop; R$81 for the 2023/2024 crop and just R$13 for the 2024/2025 crop. The funds, after being long, turned short and then went back to long, and according to the number released by the CFTC based on last Tuesday’s position, given the melting of the sugar market, might have gone back to being short. That’s causing a lot of bad mood.

Sugar and grains led the drops in commodities over the week, with a 7% downturn on average. How much is ethanol worth? In the weeks after the federal imbroglio which reduced the ICMS taxes, nobody knew what price to offer. There were even doubts about the tax to be applied on products that had already been shipped by the mills.

What could have caused the sugar drop over the week -the funds messing up and settling their positions, Petrobras reducing gas price, India announcing more 500,000 for export, the deal between Russia and Ukraine to ship blocked grains at the ports which can influence agricultural and energy commodities? It’s worth pointing out that the position of open sugar contracts in NY is still dwindling, reaching only 697,000 contracts now, so more susceptible to spasms. The market has a reasonable chance of keeping on dropping.

According to an estimate of the Indian Association of Sugar Mills, that country’s major sugar organization, the total sugarcane area should grow by 4% against the last crop. They also estimate that next year (starting in October/2022) the 12% goal of ethanol mix in gas will be reached with the country producing 5.45 billion liters of ethanol.

The third pricing volume estimate of the sugar mills destined for export for the 2023/2024 crop has found that in June/2022 there was a speed-up in pricing. We found that 1,128,000 tons of sugar were fixed over the month at the equivalent average price of R$2,296 per FOB ton. So, up until late June/2022, the accumulated total for the 2023/2024 crop was at 5.76 million tons of sugar at the average price of 17.51 cents per pound without polarization premium, equivalent to a fixation percentage of 24% of the estimated export volume for the 2023/2024 crop. The average fixation is R$2,221 per FOB Santos ton, with polarization premium. It represents R$96.69 cents per pound, with polarization.

An amazing story in the social media this week is worth being told again here. It exemplifies the process that determines the fair value of an asset, not always an easy task to do because it depends on a variety of tangible and intangible factors.

Legend has it that the famous jeweler Charles Lewis Tiffany knew John Pierpont Morgan had a thing for necktie pins. One fine day, Mr. Tiffany found a diamond one, particularly uncommon and extraordinarily beautiful. As was the custom at that time, before 1900, he sent a messenger to Mr. Morgan’s office with the pin fancily wrapped in a box and the following note: “Dear Mr. Morgan, knowing how much you appreciate necktie pins, I’m sending you this rare and exquisite piece for your consideration. Due to its rarity, the price is US$ 5,000. If you choose to accept it, please, send a messenger to my office tomorrow with your check for US$5,000. If you choose not to accept it, you can send your messenger back with the pin.”

The next day, a Mr. Morgan’s messenger arrived at Tiffany’s with the same box in a new package and a different envelope. In this envelope there was a note that read: “Dear Mr. Tiffany, the pin is really magnificent. However, US$5,000 is a little over the top. So, enclosed is a check for US$4,000. If you accept it, please send my messenger back with the box. If not, return the check and he will leave the box with you.”

Tiffany looked at the check for several minutes. It was actually a lot of money. However, he was sure the pin was worth the US$5,000 he had asked for. Finally, he told the messenger: “You can return the check to Mr. Morgan. My price is firm.” And thus, the messenger took the check back and put the gift-wrapped box on Mr. Tiffany’s table. Tiffany sat down for a minute thinking about the check he had returned and then he unwrapped the box to get the pin out.

Upon opening the box, he didn’t find the pin. He found a check for US$5,000 from Morgan and a note with just one sentence: “JUST CHECKING THE PRICE”.

You all have a great weekend.

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

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