Cane Consolidation Continues
Fundamentals
Sugar futures prices seem to be trapped in a large consolidation phase, similar to what has occurred with many other commodities, with neither bulls nor bears able to wrestle control of the market. Fundamental traders are looking to opposite sides of the globe to find potential market moving news. Starting in Brazil, analysts are expecting an ample 2009-2010 Sugar cane crop, with harvest expected to begin in May. There are some concerns that the amount of the Brazilian crop dedicated to the production of Ethanol will be less than expected, as weak energy demand and sharply lower Oil prices this year will make Sugar production more attractive to Sugar cane growers. Over in India, a less than robust 2008-09 harvest, due to difficult weather conditions and lower plantings, has caused India to be a major importer of Sugar this season. Supplies are so tight that the Indian government recently removed import tariffs on Sugar, and also started requiring Indian Sugar exporters to seek government approval before shipment, to assure adequate domestic supplies. These mixed fundamentals have caused Sugar prices to remain range-bound since late January, with traders unable to move prices out of their 1.35 cent trading range.
Trading Ideas
Traders who expect Sugar prices to remain range-bound may choose to explore the possibility of short strangles in July Sugar options. A short strangle is an option position where one sells a call option and a put option with different strike prices in the same contract month. An example of a short strangle trade is selling a July Sugar 14.5 cent call and selling a July Sugar 12 cent put. As of this writing, with July Sugar trading at 13.32, this strangle could be sold for 53 ticks or $593.60 per strangle (one tick in Sugar is worth $11.20). The maximum potential profit would be the premium received for selling this strangle and would occur if July Sugar is trading below 14.50 or above 12.00 at the option expiration on June 15th. The maximum risk on a short strangle, however, is technically unlimited, and traders should be aware of and comfortable with the risks associated with any short option strategy before they consider implementation.
Technicals
Looking at the daily chart for July Sugar, we notice a potential rounded-top formation, with a minor double top at 14.09. Although this would normally be viewed as a bearish indicator, the overall trend is positive, since the major lows were made back in October. Current price activity has the market trading just below the 20-day moving average, but above the 100-day MA, giving mixed signals for short-term vs. long-term traders. The 14-day RSI remains in neutral territory with a current reading of 48.03. Resistance in July Sugar is found at the recent highs of 14.09, with support seen 12.74.
Mike Zarembski, Senior Commodity Analyst
