VULTURES, PEACOCKS AND SERPENTS
The sugar futures market in NY closed out Friday with May/2023 at 24.15 cents per pound, 52 points above the previous week’s closing, equivalent to 11.50 dollars per ton. However, despite the upward trend, the appreciation of almost 3% of the real against the American dollar over the week resulted in a drop in the sugar value in real per ton. The reduction was R$35 per ton over the week. Therefore, our view that it’s important to take advantage of the opportunities of high prices in real per ton is made stronger.
The closing of the May/2023 contract converted into real by Friday’s exchange rate would amount to R$2,740 per ton FOB Santos, a value which – if we analyze the period ranging from January/2000 up to now and duly adjusted by the inflation rate – occurred in just 5.8% of this whole period. So, iterating our two old and threadbare pieces of advice – don’t fall in love with the market and remember that nobody goes bust with profit in the pocket.
As we have suggested, if you had followed the strategy to fix export sugar prices in real per ton and at the same time buy an out-of-the-money call 400 points back, you would have profited 90% out of the recent price hike. I will explain.
In the simulation we made for October/2023, the fixation price for today would be R$ 2,722; if you had followed the guideline above, you would have R$ 2,695 today. Ah, but so then it would have been better to wait, right? Yes, if you had a crystal ball or another one of these tools to predict the future, it would have been better to wait for sure.
NY reached 24.45 cents per pound over the week, the highest traded value in 11 years. On that April 10/2012, however, the value in real per ton adjusted to today comes to R$ 2,223, that is, 500 real per ton below this Friday’s closing price. That’s why I always prefer to analyze prices in real per ton.
I ask you to pay close attention to four moments where we have had price peaks over the last 20 years – February/2006, January/2010, January/2011 and October/2016. What was the downturn these peaks had, in some cases with worse world deficits than what today’s deficit is said to be, 90 days after the peak? Jot it down: 22%, 52%, 34% and 18%, respectively.
The funds, according to COT published by CFTC, based on last Tuesday’s position, were long by 211,943 lots, equivalent to 10.8 million tons of sugar. The week showed a price accommodation. White sugar delivery in London, on the expiration of the contract, added up to a little more than 240,000 lots. A trading company that has refineries in Asia and a refinery in the East were among the deliverers. That can mean a lot.
Look out for vultures disguised as peacocks that come along at moments like this pulling out of the pocket magical potions that will solve your problem and clear up all the questions you might have about the market trajectory.
We have already seen in the recent past (2015) mills fixing prices for the following crop when NY collapsed in August that year (10.13 cents per pound) and were convinced that the world would end, that sugar would reach 8 cents and the best thing to do was to fix everything. That’s what they did following the advice of charming serpents. I’m not saying this based on hearsay. I saw the operation.
I also saw sugar consuming industries be convinced to make operations with put options to reduce the acquisition cost of their inputs because the market was going to go up. The market fell and the company had to deal with the lossess for 2-3 balances until it finally – not by chance or not thanks to the vultures on call – recovered financially.
I learned this week – in this case without any corroboration – that a certain mill (or mills) fixed sugar in NY last October/December, but it (they) decided not to fix the dollar because with Lula’s election, the Brazilian currency – according to their assumption – would explode and then the fixations in real per ton would appreciate hugely. Those who fixed prices in the last quarter of the year (NY and exchange rate) would have – in today’s value – R$ 2,408 on average; those who just fixed NY and converted into today’s dollar would have R$ 2,098. If this story is true, it has to be a case to be presented in a MBA on risk management. It’s a truly suicidal strategy.
Do you know where the market is headed? You don’t, I don’t, and nobody else does either. Risk management is not about guessing the future. Its role is to measure and mitigate exposures to the risk the company (especially those trading commodities) invariably are exposed to in order to preserve its capacity to generate cash flow and add value to the shareholder. That’s why we have to get as much information as possible to make decisions. Fundamentals and statistics are good aides for the correct decision-making process.
I still hear things like “hedging is speculation” in lectures and events we attend. Everyone is free to believe whatever they want to as long as the shareholder’s money isn’t at stake. “But what if whoever believes that is a shareholder?” Well, everyone is free to do with their money whatever they want to, even break their own company. Other than hedging, the prophet would say, there is no salvation.
SET ASIDE THE DATE ON YOUR CALENDAR – Heads up to Ribeirão Preto: on June 27 (Tuesday) and June 28 (Wednesday), 2023 from 9:00 am to 5:00 pm at a place still to be announced we will hold the Advanced Course of Options on Futures – Agricultural Commodities (in person). We have introduced new modules such as strategies, account management, delta hedging, making Greeks easier, among other subjects. For more information, contact priscilla@archerconsulting.com.br. The number of spots is limited.
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
