Sugar futures have certainly lost some of their bullish bias this past month, having fallen over 5 cents per pound since the start of the month, as concerns about world economic recovery and buyers beginning to balk at high prices have overshadowed continued tight supplies. The International Sugar Organization expects Sugar output to remain in a deficit for the remainder of the 2009-10 marketing season, with production expected to be below demand by over 5% during the remainder of the marketing season. However near-term, buyers have been reluctant to purchase Sugar at current prices, with Egypt and Pakistan recently cancelling import tenders due to high cash market prices. Output from Brazil, the world's largest Sugar producer, is expected to increase sharply this coming season, with output up just over 6.5% through mid-February. Indian Sugar production estimates have been raised to about 16 million metric tons this season, recovering from the dismal 14.7 million metric tons produced last season due to lack of timely rainfall. Although Sugar production is expected to rebound later this year, it will not help elevate current tight supplies -- especially if large users such as India, China, and the U.S. need to enter the market to meet immediate needs. So although there appears to be light at the end of the tunnel for Sugar buyers next season, when supplies are expected to increase, we may still see one last rally attempt this spring, as buyers need to get their immediate Sugar "fix"!
With Sugar prices now trading well-off the recent highs, but short-term supplies remaining extremely tight, we may see one last rally attempt in the May Sugar contract. There appears to be strong support around the 20-cent level in the May futures that should hold if one more bull market run occurs. Some traders may wish to investigate selling May Sugar puts below major support at 20 cents. An example of this trade would be selling the May Sugar 19.75 puts. With May Sugar currently trading at 23.53 as of this writing, these puts could be sold for about 0.28 points, or $313.60 per option, not including commissions. The premium received would be the maximum potential gain on the trade, and given the potential risk in selling naked options, traders should have a pre-determined exit strategy should the trade move against them. One such strategy would be closing out the trade before expiration in April if the option premium on the puts sold trade at 2 times the premium received.
Looking at the daily chart for May Sugar, we notice prices have fallen below the 100-day moving average for the first time since mid-December of last year. Just since February 1st, Sugar prices have fallen nearly 20%, as speculative bulls have booked profits and lightened-up on their net-long positions. The 14-day RSI has become weak with a current reading of 36.56. Prices have now fallen back into the chart "consolidation" area which started back in September, which may draw buyers back into both the physical and futures markets for Sugar. 22.76 is seen as the next support point for May Sugar, with resistance now seen near 24.88.
Mike Zarembski, Senior Commodity Analyst