Bulls Riding a Sugar Buzz
Fundamentals
There is no doubt that bulls are controlling the Sugar futures market lately, as the last month has seen a dramatic 2-cent rise per pound in the old crop contracts. So what are the reasons behind this large move higher? First, we must look to the resilient crude oil market, which continues to hold just above $60 per barrel despite predictions for lower demand this year. We must remember that Sugar cane is also considered a fuel, with cane ethanol production, especially out of Brazil, a major use for Sugar. Increased ethanol production will come at the expense of Sugar production, which will lead to lower Sugar output. The second factor is a weak U.S. Dollar, which tends to support higher commodity prices in general -- and Sugar is no exception. However, strong prices so far this year have led some analysts to increase their estimates for world Sugar production for the 2009/10 crop, as producers look to take advantage of high prices, especially more marginal suppliers. India, one of the world's leading Sugar consumers, is now looking at inventories to total 5 million tons at the start of the 2009-10 season, or nearly double earlier estimates, as imports are expected to now total 2.5 million tons. With the Brazilian harvest underway, the recent tightness in the world Sugar market may be coming to an end, and with signs that production will be increasing this upcoming season, so too may the bull market in Sugar.
Trading Ideas
Those traders looking for a correction in Sugar prices or those looking to protect existing long positions may possibly choose to look to the futures options market in Sugar for trading ideas. One such trade is buying put options on Sugar just below the current price. An example would be buying October Sugar 16 puts. With the October futures currently trading at 16.63, these puts could be bought for about 107 ticks, or 1198.40 per contract before commissions. The premium paid is the maximum risk on the trade.
Technicals
Looking at the daily chart for October Sugar, we notice the sharp run-up in prices once prices rose above the consolidation highs of 14.59. This led to a nearly 200-point rally the past month, as both large and small speculators jumped on the bullish Sugar band wagon. The past week alone, large non-commercial speculators added another 3,236 new net long positions, to bring their total to just under 200,000 contracts. Although prices are now well above both the 20 and 100-day moving averages, there is a bit of a bearish divergence forming in the 14-day RSI, which might be a signal that a correction is in the making. The next resistance point for October Sugar is seen at 17.00, with support found at last week's lows near 15.75.
Mike Zarembski, Senior Commodity Analyst
