World Sugar Market – Weekly Comment – Episode 76

From a light rain to downpour

This is the first weekly comment of the year after our usual recess in January, aimed at recharging the batteries of the few neurons I still have. What this humble scribe, along with a group of reputable traders, couldn’t imagine is that January would hold so much excitement on the market, economy, and politics. And I will just stick to the world sugar market.

Four major pillars have supported the unexpected high of the sugar futures market in NY over the last days. The first one is the winning position of the non-index funds, which built their long positions close to 18.50 cents per pound and are very comfortable with this position; the second one is that the Brazilian mills are sufficiently fixed (between 65-70% of the export volume) for the crop that starts in March/April and, therefore, cannot supply liquidity for the voracious buying power of the speculators. Well, with fewer market players (mills) acting as a counterpart, the funds moved the sugar price curve upward with a much smaller number of lots; the third pillar has the industrial consumers (end consumers) as key players, because they postponed new purchases or the decreasing inventory replacement betting that the market would offer more products at lower prices due to the fundamentalist picture (I will talk more about this); and the fourth pillar is a reasonable short selling of out-of-the-money calls which at first just longed to capture premium and found itself in a situation whose imminent risk neutralization forced to buy futures. It was a light rain and it turned into a downpour.

Anyway, NY closed out Friday at 21.23 cents per pound for March/2023, after having traded at 21.86 cents per pound in the week. Friday’s closing corresponds to R$2,513 per ton, taking into account the quotation of the Brazilian Central Bank of R$5.1292 per dollar.

In the yearly accumulated, March/2023 futures contract in NY has already appreciated 119 points corresponding to a little more than 26 dollars per ton. The contracts maturing next appreciated between 9 and 28 dollars per ton, with the short maturities appreciating more than the long maturities. The market went up 200 points in 6 sessions and the open interest increased 70,000 lots. The open interest in the calls – an issue that has an impact on the fourth pillar mentioned above – with exercise price between 20 and 22 cents per pound, maturing in March/2023, which expires in two weeks, add up to 66,500 lots. That’s more fuel to the fire.

How about the fundamentals, though? Well, we are back to them. We cannot use a simplistic narrative explaining what is going on with the market and say everything is like this because India will produce less, for example. Can two million tons of sugar less in Indian exports move the market to 21 cents per pound? This is a bit too much. But that’s how it is. Markets usually go overboard in highs and lows. Then, they just have to create a narrative that makes sense.

The numbers published last Thursday by ISMA (Indian Sugar Mills Association), the major association of Indian mills, showed that the country produced 19.35 million tons of sugar until the end of January, a volume 3.42% above that of the same period last year. Remember that we estimated the cost of Indian raw sugar production at 18.54 cents per pound.

Of course, everything can change. I believe that the market has already incorporated into the prices the fact that that country won’t produce more than 34.5 million tons of sugar this crop and that there shouldn’t be a second tranche allowing for the additional export volume to the authorized 6 million tons. How about the fundamentals on this side?

This price level on the world market is economically viable for Indian, Thai and whoever else’s sugar export. However, given the inevitable absence of Brazilian mills for they are already fixed, Indian exports limited to 6 million tons, the end consumers trapped on this chess board and the cash surplus of the funds being able to continue buying more contracts, won’t stop the market from eventually being able to reach new highs. Who knows? Maybe the upcoming maturity of March options which expire on February 15 will give the market another jolt. But, meanwhile, those who have sugar to fix but won’t, might be making a serious mistake.

The Center-South should produce 37 million tons of sugar in the 2023/2024 crop, a significant volume which should adequately make up for a possible reduction in the Indian total export. The oil market (WTI), which hasn’t recovered from the fall it took in June last year, is still in a boring interval of 75-83 dollars per barrel. Natural gas has dropped 47% this year, diesel 16%, and gas 6%. The real appreciated against the dollar and even traded at R$ 4.9400 this week. The appreciation of the Brazilian currency has already exceeded 5% over the year. So, if this trend continues, gas price should be readjusted downward, pressuring the already battered hydrous even further. Those who can produce more sugar will do it.

With all these ingredients on the table, what has to happen for the prices to keep going up over and over again contradicting the fundamentals? The answer should come up within the next couple of weeks.

On January 30, the sugar market said goodbye to one of its greatest Masters (with capital M): Ailton Moraes Sacramento. This unforgettable friend was the mentor, teacher and the inspiration for generations of sugar and ethanol traders in Brazil and abroad. He was beloved in all four corners of the sugar world, back when elegance, nobility, humbleness, deep knowledge of the market, respect for your peers, fair-play and gentlemanly qualities were in fashion.

Our friendship took roots when he retired, because – curiously enough – we never did any business at all when we were executives in our respective companies in the sugar world. However, we found out we shared a passion for music, which ended up bringing us even closer together. We had a project to record a CD, which unfortunately was aborted by the pandemic. Ailton wrote some songs which would make the most unsuspecting listener think he was some great Brazilian popular music star. Are these claims made by some nostalgic friend? So, check out the songs “Aquela Cidade”, “Águas do Rio”, “Uma flor” and “Morena” on Spotify and you will see that this is no overstatement.

Having a rich sense of humor, Ailton had such an intense passion for life that his unexpected departure left us incredulous. It’s life shaking up our finiteness, so uncomfortable and at the same time so inexorable, revealing our fragility when we don’t notice that in an instant, we might be hugging a dear person for the last time. Valuing those we love and celebrating life, family and friends every time, before everything disappears, should be the norm.

Now, dear readers, I ask for your permission to repeat the message sent to Ailton (in this very weekly comment) when he retired in October/2013: “The words by composer Nelson Cavaquinho, who was from Rio, in his samba song says we should always honor and give flowers to those people we love, with whom we had the privilege to live in our short walk through this world, in life. The flowers in life will go to Ailton Sacramento who, after 40 years devoted to the sugar market in his inseparable EDF Man, decided to say goodbye and dedicate himself to another not less intoxicating passion: music. Ailton is one of those people who makes our lives lighter, just for the privilege to have met him. Have lots of success and health in this new phase, my friend”.

Almost 10 years later, my feeling and affection for this amazing human being have only increased. My dear friend, it was a great privilege to have met you on this life road. I wish you lots of light – you who did so much for your fellowman in his personal and professional life. See you one of these days.

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

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