RUNAWAY TRAIN
In a week shortened by the Easter holiday, NY headed stubbornly toward the top, which many believed (this scriber) to be about 200 points behind and others believe it is 200 points ahead – total craziness.
The four sessions this week accumulated a 133-point high for May/2023, pretty much the same positive fluctuation seen on the following maturities: July and October/2023 and March/2024. The prices of these maturities which make up the 2023/2024 crop of the Center-South increased at the same time, pointing to a strong, random buying pressure in all the months. If it weren’t so, the spread would have fluctuated, which didn’t happen. The growing concern over sugar availability rubbed off on the market and a number of bullish factors made things more complicated.
The white sugar market frenzy in London, with the white premium trading at amazing 163 dollars per ton, contributed with an extra dose of ammunition to the performance of the runaway train the sugar market has turned into. Just a month ago, May/2023 was trading at 300 points cheaper! With a good dosage of panic (on the part of the industrial consumers) and a sense of opportunity (on the part of the speculating funds), the market is free to continue going up (I’m talking about May/2023). Where is this headed?
Whether this trajectory will continue or not will depend on the necessary level of coverage to be practiced by the open-mouthed consumers, on the size of the pockets of the funds (which must be long by more than 200,000 contracts), on what will be done with more than 50,000 short calls, which expire next week, whose exercise price ranges from 21 to 24 cents per pound, and on the effects of the hole caused by the margin calls over this short period of time.
If we assume that the mills are fixed by 85% of the export volume and 2/3 of this volume is direct or indirectly in the book of the trading companies/financial institutions/suppliers of counter operation, in a month the margin call drained about US$1 billion out of the cash flow of these companies. In a period of credit crises and money reduction in the system, look at the damage that should bring about.
The futures contract for May/2023 closed out at 23.63 cents per pound (on March 7 it traded at 20.63), after having reached 23.68 in the day’s session. This is the highest quotation of the sugar traded in NY since October 7/2016. Curiously enough, the price traded on that day converted into real per ton and adjusted by the inflation rate amounts to R$2.766 per ton today, pretty close to the equivalent value today.
On average, the values traded in NY appreciated R$134 per ton over the week against the previous Friday. The mills sharpen their pencils and make calculations to see how much more sugar they can produce – on top of the volume already committed and fixed – in order to take advantage of the excellent prices. The average of the maturities mentioned above come to R$2,743 per ton. Remember that over the last 20 years a similar or better price has just occurred in only 5.6% of all the events.
Unless the mill’s executive has “insider information” about the trajectory the market will take, be it by means of artificial intelligence, crystal ball, palmist, astrologer or magicians, it’s good advice not to miss out on an opportunity like this, especially when we compare the declining sugar production cost for this year. Not fixing prices hoping for better days might turn out to be a fatal mistake. Nobody goes bust with profit in the pocket.
Fixing prices in real per ton is recommended especially when there is a perception on the part of the financial market that the dollar can sneak up on R$5.0000. Don’t mess with risk management. Nobody knows where the market is headed for. Use statistics in your favor. Our recommendation has been to fix prices in real per ton and to buy an out-of-the-money call option. Even with this huge fluctuation of the last 30 days, whose fluctuation comes to R$300 per ton, the type of suggested operation provided – up until Friday – for the capture of at least 2/3 of this advantage.
The changes to fuel taxes as of July 1 have brought a breath of fresh air to the hydrous market, but with the sharp increase of sugar in NY, the difference between the two has gone up. Based on the B3 closing on Friday, hydrous is trading at 750 discount points coming close to the greatest discount of 800 points seen exactly in 2006.
The obscurantism of the left wing misruling/rulingthe country continues in full swing. One day is a liar disguised as minister (or is it the other way around?) spitting out nonsense about changes to the fuel pricing, a fact that is immediately refuted by Petrobras by means of an announcement to the market. Another day is the unproductive Federal President – the most legitimate personification of backwardness – wanting to lower interest rates by decree, among other atrocities. PT’s (Workers Party) leftists would do Brazil untold good if they kept their mouths shut for a while and tried their best to do something good and, when they felt the irresistible compulsion to show off – neurosis shared by its members – put a shiny cucurbitaceous specimen on their empty heads.
To read the previous episodes of World Sugar Market – Weekly Comment, click here
To get in touch with Mr. Arnaldo, write on arnaldo@archerconsulting.com.br
