Rain Dance
Fundamentals
Sugar prices are sharply higher once again this morning, due to rain issues in India and Brazil, which may curb production for the 2009-2010 crop year. A much milder than expected monsoon season in India has traders changing their initial opinions that Indian production will resume normal levels after a disastrous 2008-2009 crop year. This could very well result in India continuing to be a net importer instead of a net exporter of Sugar cane. Analysts are suggesting that India's imports will now be 5.0 million metric tons, which is double prior estimates. Brazil, on the other hand, has had more than enough rain and could lend some rain to India. Heavy rains have interfered with the current crop year harvest. The market has priced-in a large Brazilian crop to at least partially offset the increase in Indian imports, but harvest delays could result in a much larger global supply deficit. Brazil has been asked to shoulder the burden and produce more Sugar cane to make up for deficits elsewhere. The South American nation has certainly made the effort, but this could be thwarted by the el Nino wind pattern dumping more rain than farmers can deal with. Similar to what has been occurring in other commodity markets, Sugar traders have been keeping a close eye on the CFTC's efforts to curb commodity market speculation. While Sugar traders have not been targeted in the same way that Crude Oil and Wheat speculators have, there are a large number of funds participating in the market which may be forced to limit their activity. This can be seen as having a negative influence on prices, but a decision by the Commission could be weeks away. The US Dollar will play a minor role in influencing the market going forward, but outside markets have only had a minimal impact on the Sugar market of late.
Trading Ideas
Given the recent run-up in prices and volatility, some traders may wish to wait for a more opportune time to enter the long side of the market. The overbought technical conditions suggest that prices may possibly pull back, perhaps near the 18.00 level. Therefore, some traders may wish to consider buying an October Sugar contract on a limit at 18.15, with a stop at 17.60 and an upside objective of 19.45. This trade risks around $616 for a profit potential of approximately $1,456.
Technicals
Turning to the chart, the October Sugar contract continues to climb, after breaking out of a bullish wedge pattern on the daily chart. Prices have not yet made the measured move from the formation, which suggests prices could rally to the 19.30's. The technically overbought conditions could hamper the push higher and suggest that prices may need to correct a bit before advancing. The RSI indicator is at 80%, while the slow stochastics are in the mid-to-high 90's. The 18.00 level can be seen as near-term support, which was tested after the initial breakout from the wedge. Declines below 18.00 could result in a reversal of near term technicals.
Rob Kurzatkowski, Senior Commodity Analyst
