Traders May Sour on Sugar
Fundamentals
Sugar prices are lower for the third consecutive session, dragged down by lower energy prices and demand uncertainty. Indian supply and demand have been a driving force behind the rally that started in December, but traders are uncertain that current conditions will continue. While India is expected to see its output shrink by almost 11 million tons compared to last year, Brazil is expecting a record crop, which could offset the Indian shortfall. The combination of an expected recovery in Indian production in the upcoming crop year and an early start to the Brazilian harvest may indicate that the current deficit may make way for a surplus in the 2009/2010 crop. While India has stepped up imports to make up for their shortfall, there have been a high number of mills shutting down, indicating Indian imports may soon fall back to normal levels. Brazilian ethanol demand has been lackluster at best, and relatively cheap gasoline prices have lessened the appeal of ethanol as an alternative fuel. The fact that Crude Oil prices have fallen back over the past few sessions certainly doesn't help. The Commitment of Traders report shows overbought conditions in the Sugar contract, indicating that funds and specs may have overextended themselves on the long side and may give traders an incentive to take profits sooner rather than later.
Both the fundamentals and technicals seem to be favoring the bear camp at this point, but it is not an overwhelming bias. Traders may choose to tread lightly and enter a bear put spread instead of shorting the future, limiting profit potential, but also risk. Bears may choose to buy a July Sugar 12.50 put and sell the July 12.00 put for a debit of 0.20, or $224. The maximum profit of 0.30, or $336, would be reached if the underlying July futures contract finished below 12.00 on the June 15th expiration date.
Technicals
The July Sugar chart shows the sharp upward trend that started in December may be flattening or turning lower. The futures contract closed below the 100-day moving average yesterday and appears poised to close through the average again today, barring a sharp turnaround. Prices are testing support at the 12.82 level for the second consecutive session. If this support is broken, traders may opt to take profits and stops could be triggered. The next area of substantial chart support does not come in until the 12.00 area. Momentum is showing bullish divergence from RSI, suggesting prices could stabilize near current levels.
Rob Kurzatkowski, Senior Commodity Analyst
