Sugar Saw Another Week Of New Lows

The Sugar market in NY closed Friday after another week with prices reaching new lows since 2010. October/2014 closed at 13.50 cents per pound with a 28-point low (US$6.17/ton) against the previous week. The other trading months over the next two years were worse than this year, with prices falling between 45 and 67 points (a 10 to 15 dollar-fall per ton in the week). And as it usually happens in situations where everything is under a lot of pressure, some people think the market will fall even further in October, and when it expires, will March follow suit and repeat the same quotes? Is that possible?

A stronger dollar and falling commodities (oil, wheat, soy, corn, sugar and coffee) can back up this idea. Here, the course of the elections can bring more volatility to sugar. The more Dilma goes up in the polls, the more the price of the Petrobras shares goes down due to the market realization that the wrong politic by government in relation to fuel will continue, impacting ethanol and, therefore, sugar. However, it remains to be seen how much more sugarcane Brazil can produce next year. We need 35 million tons more than we did this year – will that be possible?

Feed to the bulls: the accumulated sugar production from March to July is at least 3.6 million tons less than, for example, that of 2010/2011 when we had the market trading at 13 cents minimum per pound.

At a private event held in Ribeirão Preto this week, one of the topics that was brought up about the recently intense fall in sugar prices in NY was the high correlation shown between oil price and commodity. In other words, the fall in sugar not only has the strength of the foundations already discussed in detail here but also a very strong action from funds. The ingredients of the indigestible cake served to the producers by the market have, among them, the expectation that a recovery in prices would occur before fixing the remaining sales, the El Niño which never came, puts sold to finance calls bought which turned out to be lethal traps and obviously Thailand threatening to flood the delivery for October/2014 late this month with low-quality sugar. It is hard to digest all this.

The export volume of sugar for August/2014 was 2.3 million tons placing the 12-month accumulated at 24.66 million tons, almost a 16%-fall compared to the exported volume over the same previous period. The export value in twelve months was below US$10 billion for the first time since May/2010: US$9.96 billion. Ethanol exports in August reached a little over 78 million liters, accumulating 1.86 billion liters in the twelve-month accumulated, which is almost a 50%-fall against the volume over the previous period, the smallest one in the past two years. The export values came to US$1.19 billion in the accumulated.

From January to August this year, Brazil exported 14.9 million tons, a 4.2-million-ton fall against the same period the previous year. This market loss was led by Asia, to which we exported 1.9 million tons less (China lead the way at 728 thousand tons), followed by Africa with a 1.3-million-ton reduction (Morocco leads the way at 377 thousand tons and Ghana at 208 thousand tons less).

March/2015 straddle, exercise price of 16.50 cents per pound, trades at 170 points. It consists of selling the call and the put simultaneously at the same exercise price. If the market expires below 16.50, you stay long at 14.80 cents per pound; if the market expires above 16.50, you stay short at 18.20 cents per pound. The main risk is an increase in market volatility which can substantially affect the market value of the sold premiums and then call margin. It doesn’t seem like a bad strategy for the consumers or the mills given the present situation and the few available options. It has to be monitored closely.

Finally, there is a bull on this market. His name is Abah Ofon, analyst of agricultural commodities at the century old English bank Standard Chartered. In an interview last week for the American CNBC, the analyst said he believes next year will have better sugar prices due to the reduction of stocks and lower yield in the sugarcane harvest. When he was being interviewed live, October/2014 in NY was being traded at 15.09 cents per pound!