NY closed the week with Mar/14 leaving the screen at 16.47 cents per pound, lower 25 points (or 5.50 dollars per ton) for the week, different from the remaining traded months, which were higher between 7 to 52 points (or almost 2 to 11 dollars per ton). Friday’s session was more pressured due to Mar/14 expiring and also by the little or no disposition from the longs to receive sugar in the physical market. Therefore, the spread was pressured so that long positions were rolled to the following expiration months so that maybe by then, if the market reacts forcefully regarding the drought, sugar can be received.
Despite the pressure, sugar in NY closed February with the second highest return among agricultural commodities traded at the exchanges, with an increase of 18 % approximately. A little timid, it is true, if compared with coffee, which went up 56 % in the month. In the 2014 accumulated, sugar performance is weaker, being only 8 % higher. And in the 12 months accumulated, it still shows a loss of 3.5 %. All of this to say that there is a good chance we have not seen the high of this market. Far from it. In fact, there is still a lot of fuel to burn as we will see below.
The numbers for the crop forecasts of bona fide companies show us that 2014/15 may have a sugar cane production in the Center South lower than the previous crop year. We have seen not infrequently forecasts around 570 million tons of sugar cane. We already said here what might happen with the prices in NY should these forecasts be confirmed. Archer will most likely have its first forecast this coming week.
The market, i.e. the majority of trading companies, still is not that encouraged with the price recovery seen. Lots of traders lost money in the basis (the difference between the physical market and futures, also known as premium or discount). Therefore, the recent discounts of sugar in the physical market sunk since the trading companies did not want to take new positions, which would only add to their previous ones already at a loss. That is why few new deals were done since the current commercial contracts are showing a loss when marked to the market.
However, the weather has changed this picture. The funds were short at an average entry price of 17.55 cents per pound basis May/14 and had a non-realized profit around 150 million dollars. Then, the rain did not come, lower figures regarding sugar cane production in the Center South began to pop up and the worry from those who were naked shorts triggered the repurchase of positions in the NY futures, so that the prices reacted swiftly. Not only has the price direction changed, but also the volatility (risk perception), which was trading at 15 % and now is around 30 %. It hurt the pockets of those short options.
The perspective of a lower volume of sugar cane for this year has brought an avalanche of contracts being traded and a drop in the open positions. The average of contracts traded daily in February (only futures) was above 220.000 lots (90 % higher than the daily average of Jan/14 for example or 1/3 more than the average of Feb/13). In other words, in one hand the funds are repurchasing their shorts and on the other hand the late mills that still had pending fixations for sugars to be shipped against Mar/14 and May/14, and took advantage of more interesting prices (in reals per ton) and unloaded what they could.
Notice that we are talking about the funds on one side and the mills on the other. And what about the trading companies? It does not seem to the market that they are worried at the moment. So much so that the March delivery this Friday was a non-event. The spread Mar/May was done at 119 points of discount. In other words, nobody wants physical sugar at this moment. To get in again and buy the trading companies will have to unload what they still hold first via contracts. When things become clearer (if the sugar cane production drop is confirmed) then they will get in again. It remains to be seen whether the market will wait for them.
The government system in Brazil, with 10 years of the PT party, is not a democracy. Here we have a kleptocracy, which occurs when the majority of the public system is dominated by people practicing political corruption, institutionalizing it along nepotism, peculate and a mob creation. We have then a situation where related actions to these traits go unpunished, since all sectors are corrupted already, from the judicial to the political and economical systems. Brazil today is at the bottom of the moral barrel. It remains to be seen when we will get out of it.