Jittery Market: Is A Recovery Likely?

The week was sleepy form the most part due to the US 4th of July holiday, but still the market dropped a bit further. In fact, on Friday’s close, all the months, except Oct/13, closed at the lows of the contract. This drop, paradoxically, is different from the others, since the mills, which do not have liabilities in dollar, are celebrating the appreciation of the dollar currency, which affects commodities but improves the fixation of the exports equivalent in reals.

The better capitalized companies observed attentively the valuation of the dollar and made some volume of NDFs (term contract of foreign currency with financial liquidation) with next year’s expiration, which when combined with the fixation in NY, is bringing a value in reals well above the average production cost. As per the Archer Consulting Model, the fixation for the 2014/15 crop if done this way (hedge of NY and currency at the same time) may return 27 % above the production cost.

October ended up becoming July
July expired at 16.38 cents per pound while October traded at 16.93 cents on the same day. Well, this week October fell to the level that July expired at, influenced by the timid demand and the real devaluation. The expiration months, especially those referring to the 2014/15 crop, ended up dropping almost 25 dollars per ton in the week.

The fixations by the mills for the 2013/14 crop year have accelerated this month of July, arriving at 18.6 million tons, around 70 % of the volume estimated for exports, at an average price of 17.91 cents per pound.

The Glencore Co. once more presented its annual Seminar in this past week in Sao Paulo, always well attended and of a highest caliber since 1999. The lectures emphasized that the sugar international market will have great difficulty to increase its value, but they acknowledge that weather, exchange rates and the macro scenario can change this picture.

Producers in the Northeast who attended the seminar mentioned above, commented that they were appalled at the nonsense said by Dilma in her recent speech to an entity that gathers the suppliers of sugar cane in the state of Pernambuco. They say that Dilma cannot tell a sugar cane plant from a corn one, specially after having been around her antecessor for so long.

Around 2 months ago some traders believed that NY sugar market would visit the 15 cents per pound soon. Up to now the market has bravely stood its ground. The fact is no one is bullish these days as all seem to look at the market suspiciously, believing that we may go lower still. With the experience of many years in the commodities market, I can say that I have seen this movie before. The market has kept a good level in reals but it is still below the 200-day moving average, a situation that is rare to be observed. Far from being bullish, I believe that we will enter a phase more constructive pricewise and it will come mainly by one of the 3 points mentioned by the Swiss trading company: weather, exchange rate or macro scenario.

A seasoned sugar trader commented among friends that July has been particularly generous with the market in the last 6 years. In other words, usually the market recovers in July the pitiful performance that it usually has in the months of May and June. Will this happen again?