SUGAR: FACE TO FACE WITH THE UNPREDICTABLE

The sugar market in NY closed out the week with a slight fluctuation on the futures contract for March/2023, which closed out at 19.49 cents per pound, a 16-point increase against last Friday’s close. The other months closed with a small negative fluctuation, between 2 and 22 points, with an average drop of only two dollars per ton.

The week has been relatively quiet on most commodity markets. It seems that the end of the year coming up and the dispersion caused by the Soccer World Cup being held in Qatar have contributed to the market participants’ observing the movements and fluctuations with particular attention. The year-end’s pace seems to show that the movement favors the adjustment of the books, the mitigation of unnecessary risks and the aversion of strategies that can jeopardize the year’s result. Therefore, just what is essential so as not to have to face the unpredictable is done.

Managers have been keeping their eyes wide open on the Chinese steps. It looks like that the situation in that country regarding the blocks created to reach zero-COVID has quieted down over there giving a new lease of life to the stock markets and also to the oil market.

In the weekly accumulated, WTI recovered 5.32% followed by Brent with 2.57%. VIX, an index that measures the volatility of the American stock market but which also reflects the nervousness of the global investors, showed a 5.5% drop over the week. It doesn’t exactly mean the sea isn’t rough but the height of the current waves allows for navigability.

In Brazil, we still don’t know how the ministry of the new government that takes over the country as of January 1 will be made up of. Regardless of that, the real closed out the week at a 3.58% high, at R$5.2199 per dollar after having reached the R$5.1628 low. I wonder if people on Faria Lima (Financial heart of Brazil) have already taken in the possibility of having Haddad as the finance minister. The real has appreciated.

With the appreciation of the Brazilian currency together with the sugar futures market, the weekly accumulated showed a downturn of R$120 per ton in the sugar traded in NY and converted into real. A similar devaluation affected the monthly averages of the contracts that cover the 2023/2024 and 2024/2025 crops. We have suggested paying attention to pricing with the sugar recovery in NY and with the recent devaluation of the real (now bouncing back). It’s worth taking a look at the sugar history below.

Since 2004, converting the daily closes into real per ton according to the quotation of the day supplied by the Central Bank and adjusted by the inflation rate using the IPCA, we divided the sugar values into four quartiles: a) 25% of the times the quotation was below R$1,550 per ton; b) 25% it was between R$1,550 and R$1,825 per ton; c) 25% it was between R$1,825 and R$2,200 and d) 25% of the times it was above R$2,200. This is a good parameter to use as far as sugar pricing for export is concerned. Note: the market has been above R$2,000 per ton only in 10% of the events since 2004!

In thesis, the industrial consumers should sell puts at the strike price corresponding to the first quartile and the mills should sell calls at the strike price in line with the fourth quartile. That’s a good strategy to decrease the acquisition cost of raw material or to add value to the mill.

The hedge funds are still long by huge 158,000 lots in NY. We think that this gigantic position carries a high dose of volatility. With the hydrous price drop of about 1.2% over the week, the fuel discount rose to about 250 points against sugar. The perspective of a possible “more sugary” crop strongly threatens the position of the funds, whose vulnerability has already been discussed here. Let’s wait and see.

The World Cup has been demonstrating how black swans are always surprising us in all human events. Who would guess that Germany would be eliminated, just like Uruguay; or that Saudi Arabia would beat Messi’s Argentina, South Korea would beat Portugal and Japan would beat the powerful Germany and Spain, both potential title winners? Do you know which teams haven’t lost in this Cup yet? Holland, England, Morocco and Croatia!!! As Nelson Rodrigues would say “soccer without Mr. Imponderable Smith would be dull”. And that’s what makes it an exciting sport. And this Cup is being attacked by black swans. I bet the champion will be one of them…

How about the black swans on our market? Have you thought about that? How about buying a put of 15-16 cents per pound for July/2023 – remembering that these protections are for unlikely events that would have an impact on your P&L? I find it hard to believe sugar can drop to 15-16 cents per pound, but I also thought Japan would be out of the picture.

You all have a good week.

Arnaldo Luiz Corrêa