Sugar Prices Soar, But For How Long?
Fundamentals
Sugar prices continue to soar, with the most active March contract moving above the 25-cent level. Current tight supplies coupled with harvest delays in Brazil, the world's largest Sugar producer, due to wet weather have given trend-following traders more confidence to add to existing long positions. This should be the second consecutive year in which Sugar production has failed to meet demand, with the International Sugar Organization (ISO) estimating a 7.2 million metric ton deficit in the 2009-10 season. However, the highest prices seen since the early 1980's have Sugar-producing countries increasing production for the next marketing year. Brazil is expected to see a 10% production increase next season, and India, the world's largest consumer of Sugar, is looking for a 50% plus increase in its Sugar output from a very disappointing 15 million metric tons this past season. Production next season is expected to increase enough that the ISO now expects a Sugar surplus of around 1 million metric tons for the 2010-11 season. The conflicting fundamentals between crop years is producing active trading in Sugar spreads, with the focus on the nearby bull spreads -- especially March/May and March/ July, with the market trading in a backwardation of over 1 cent in the March/May 2010 spreads, as any additional production is not expected to hit the market until the middle of 2010. Though the expected increase in production should help keep price increases in check next season, ample demand should help prevent prices from falling too far, and single-digit Sugar prices are unlikely in the next several months.
Trading Ideas
Given the tightness currently seen in the world Sugar market and the expected potential increase in production later in 2010, some traders may wish to explore Sugar option strategies that could take advantage of the differing fundamentals expected next year. One such strategy would be buying a put calendar spread. An example of this spread would be buying a July Sugar 22-cent put and selling a March Sugar 22-cent put. With March Sugar trading at 25.19 and July Sugar trading at 22.53, the spread could be purchased for 1.98 points, or $2,217.60 per spread, not including commissions. The hope would be that March Sugar will continue to gain on the July futures, with the premium received for selling the farther out of the money March put helping to offset the cost of the just out of the money July option, as well as allow the trader to hold a bearish option position in July, when increased supplies of Sugar are expected to hit the market.
Technicals
Looking at the daily chart for March Sugar, we notice prices finally broke out of the 3-month-long price consolidation formed from the contract highs made back in September. The breakout was confirmed by higher than average volume. Prices are now well above both the 20 and 100-day moving averages, and momentum is strong with the 14-day RSI currently reading 69.60. The most recent Commitment of Traders report shows large non-commercial traders adding an additional 1,520 net long positions to their position, which stood at a net-long 143,582 contracts as of December 8th. However, this was before the recent price breakout to the upside, and a further increase in the net-long position is likely in next week's report. 25.43 looks to be the next resistance point for March Sugar, with contract highs of 26.25 looming as the next upside target should 25.43 resistance be taken out. Support is seen at the 100-day moving average currently near the 23.00 level.
Mike Zarembski, Senior Commodity Analyst
