World Sugar Market – Weekly Comment – Episode 83

Shoot it… There’s no goalkeeper

Sugar stands out as one of the agricultural commodities that have appreciated the most in the yearly accumulated. It has gone up by almost 11%, just behind cocoa (12.5%) and orange juice,which has gone through the roof this year (33%). The sugar futures market in NY closed out the week pretty healthy trading at 22.36 cents per pound, the same price traded at on February 28, now with May/2023 repeating what had happened with March/2023. The bulls cannot stop laughing on their way to the bank. It’s estimated that the funds are making at least US$600 million with the “modest” position of 190,000 contracts they have. Yes, I’m being ironic.

The contract ended up closing Friday at 22.30 cents per pound, a 148-point appreciation equivalent to almost 33 dollars per ton. As the real appreciated around 3.5% against the dollar in the weekly accumulated, the fluctuation in real per ton was smaller. The corresponding months to  the 2023/2024 crop of the Center-South closed out at an average high of 32 dollars per ton; the 2024/2025 crop at an average of 22 dollars per ton.

Everyone is bullish. It looks like a meteor, like that one which wiped out the dinosaurs, fell on Earth and eliminated all the bears. They have all vanished, or have been admitted to some rehab clinic. True is that there is already a waiting list to sign up new bulls. The fact is the fear of an upward trend is making the sugar options market bubble up and the short covering of futures and options feed this upward trend even more. With prices going up, margin calls in futures and in short calls bleed the cash flow of the companies and the panic button is this close to being pushed.

It’s no use crying – the speculative funds continue setting the tone for the sugar futures market, indirectly helped by the fact that the mills are fixed by more than 85% of the estimated export volume, according to a model developed by Archer Consulting and having been used for more than ten years. Our number projects an export of 24 million tons; however, if this number is – say – 28 million tons, the percentage, of course, is smaller. The mills that already foresee an increase in sugar production are making new fixations so that they won’t miss the opportunity of such generous prices.

With Friday’s close, a sugar fixation for export in October/2023 is equivalent to R$2,600 per ton FOB, using the NDF (Non-Deliverable Forward), maturing in that month. R$2,600 is a price that has only been exceeded in 9% of the times over the last 20 years (duly adjusted by the inflation rate).

We have always pointed out here that a good strategy is to fix prices in real per ton and at the same time buy a call 150 points above the market to participate in a possible high trend. Actually, this operation is a synthetic put.

Suppose that four weeks ago (March 3) a mill fixed sugar prices for October/2023 at 19.59 cents per pound and got an exchange rate of R$5.4639 (spot was trading at R$5.2000) and bought a call at an exercise price of 21 cents per pound, paying 65 points equivalent to R$74.62 per ton. The net fixation of the mill was R$2,384. If it made the fixation today, it would get R$2,567 per ton. But, wait, how much is that option bought on March 3 worth today? It’s worth R$156 which added to the net fixations comes up to R$2,540. That is, today the price is just R$27 above the synthetic put. With a bonus, if the sugar price continues to go up, those who fixed today will keep R$2,567. Those who fixed and bought a call will continue to participate in the high. Simple solutions!!!

The COT (Commitment of Trades), published by the CFTC (Commodity Futures Trading Commission), shows that the funds bought  another 16,000 lots over the week. As a renowned futures broker told me while he was puffing on his Cohiba in the balcony of his apartment overlooking Manhattan skyline using a soccer expression, “The funds just have to shoot the ball into the goal because there is no goalkeeper”. That is, since the mills are fixed almost to the limit of their exports, any larger purchase on the part of the speculators puts the market on higher levels. And everything points to them still having a lot of ammunition.

Just as some food for thought, it’s worth observing that the monthly average of the daily NY closes converted into real by the rate supplied by the Central Bank of Brazil and adjusted by the inflation rate found R$2.411 per ton in January, R$2,567 in February and R$2.508 in March. The average of the closes of the first month traded in NY was 19.95 cents per pound in January, 21.40 cents per pound in February and 20.97 cents per pound in March. The quarter closes out with the average price higher than that in February. Will April bring us any surprises? Over the last 20 years, in only 35% of the times has the average price of April been superior to that of March.

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

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