Traders Still on a Sugar Rush!
Fundamentals
Sugar futures have been one of the best performing markets of 2009, as prices have more than doubled since the start of the year. It has been nearly 30 years since world Sugar prices have been this high, with the most active March contract trading above the 27 cents per pound level as of this writing. Tight cash market supplies have been the driving force behind the price surge, as the market has been in a deficit situation for the past two years. Delays in the harvest out of Brazil have added to the current supply situation, as wet weather conditions have kept producers out of the cane fields. Lately, the rise in prices has been especially notable given the recent strength in the U.S. Dollar, which would normally be a negative factor for commodity prices. Although production is expected to rebound in the 2010/11 season, those supplies will not help to elevate the current supply issues. It may take even higher prices near-term to help cull demand from countries such as Indonesia and India; at least until new crop supplies can enter the market.
Trading Ideas
Given the near-term tightness in Sugar supplies and the potential for a rebound in production in the 2010/11 season, some traders may wish to consider buying near-month Sugar futures and selling deferred Sugar futures. A example of this trade is buying March2010 Sugar and selling July 2010 Sugar. As of this writing, March Sugar is trading at a 4.40-cent premium to the July futures. Traders buying this spread are looking for the price differential to continue to widen. Traders should remember that trading futures spreads may not necessarily be less risky than holding an outright position. The spread could narrow instead of widen, and it is also possible for one month of the spread to be trading higher on the day and the other month to be trading lower.
Technicals
Looking at the daily chart for March Sugar, we notice the recent run-up in prices was accompanied by lower volume. This is most likely due to the holidays, but could also be a sign that fresh buyers are not chasing the market higher and short-covering is behind the price rise. The 14-day RSI has just reached overbought territory with a current reading of 71.15. We may not know the true health of the bull market until the trading desks are back at capacity after the New Year's holiday. Monday's highs of 27.40 are seen as resistance in the March contract, with support found at last week's low of 25.10.
Mike Zarembski, Senior Commodity Analyst
