Year-End Buying Opportunity?
Is the recent drop in the 11's an unexpected gift, or is it an indication of a longer-term structural change in the marketplace?
A polar vortex or just temporary scattered flurries?
It is important to note a couple of key data points to help us understand the sudden drop in flat prices.
There has been no material change in the market supply fundamentals, in fact parts of global supply continue to deteriorate.
Key traditional net exporters of sugar have become net importers (India, Mexico) which creates market diseconomies, complicates supply chains and serves as a catalyst for regional high prices to continue – these situations appear to be weather pattern and crop health related – multiple causes require multiple solutions.
The supply solution to the world sugar shortage has been Brazil, which concentrates risk of supply in one place – risk in inflation, crop, processing, loading, inflation and political.
The 11’s and 16’s have acted in a way that demonstrates absolute correlation – which tells us that the U.S. market should move in tandem with the global market price + Tier II tax/#
Costs for growers, mills and refineries have shown no deflationary tendencies – and they seem inclined to pass fertilizer, labor and equipment costs on, some respite from utility costs.
There has been no material demand destruction related to reformulation of any kind from the data – demand appears to be steady to increasing.
Other commodities have unexpectedly come off as well. Could this be part of a larger effort by speculators to take some year-end profits or is it a response to derisking as a result of geo-political normalization or general acceptance of risk?
Due to the U.S. Sugar program, through the use of imports, the market will always be managed to a 13.5 stocks to use ratio – so generally, any short-term price fluctuations will normalize to a mean over time.
The USDA has a very difficult job to do, but at the end of the day it is the ‘U.S. Department of ‘Agriculture’ – not the U.S. Department of Industrial Users, so we don’t see any material change coming that would dramatically impact the 16’s.
In the end, the 16’s will trade at a premium equal to the Tier II tax and shipping to the 11’s. Much of the run up in the 11’s was the result of speculation, much of the drop the result of a reversal in speculation as traders sell to lock in gains. Speculation could very easily shift, just like it did this past summer, reverse and send prices higher after the new year.
In summary, fundamentals are telling us sugar supply is still tight. Going forward, the question then becomes, “will the managed money find its way back in the market, where they view going long at 20 c/lb a good entry point?”.
Of course, we do not have the absolute answer to this question, but we are recommending US buyers cover some portion of their volumes in 2024 and 2025 with this buying opportunity, rather than getting too greedy and waiting for prices to fall further.
In the meantime, enjoy the holiday pause in trading to enjoy time with family and friends, along with all those sweet indulgences that fill our tables.
Happy Holidays from the entire team at CSC Sugar and Sugaright!
