What a Difference a Year Makes!
Fundamentals
There is an old saying that "the cure for high prices is high prices", which means that producers will ramp-up production in a commodity to take advantage attractive prices. This is definitely what is occurring in the world Sugar market, as production estimates for the 2010-11 crop year have rebounded sharply, causing Sugar futures prices to plunge. Since February, front-month Sugar futures prices have fallen over 50%, as traders are now looking for a world Sugar surplus this coming season, as opposed to the Sugar deficits of the past two years. Sugar production in India, the world's second largest Sugar producer, is expected to come in between 25 and 30 million tons this year - which is well above the 19 million tons produced last season, as the monsoon rains were well below average last season. In addition, the Brazilian cane harvest is running well so far this season, as ideal weather conditions have the harvest off to a strong start. Analysts are now looking for a global Sugar surplus of between 5 and 7 million tons for the 2010-11 marketing year. In fact, the potential of increased Sugar supplies is so strong that the Indian government is expected to re-impose an import tax on Sugar, as local prices in that country have fallen and concerns of domestic shortages have subsided. The surging U.S. Dollar is adding to the bearish tone in all commodities, and Sugar is no exception. The most recent Commitment of Traders report shows large speculative accounts liquidating their long positions in Sugar futures, with large non-commercial traders shedding 15,393 contracts for the week ending April 27th. However, the net-long position is still over 120,000 contracts, and fresh long liquidation selling is likely if prices continue to slide.
Trading Ideas
With the technicals and fundamentals seemingly pointing to continued weakness in Sugar futures prices, some traders who have a bearish bias may wish to explore selling out-of the money calls in July Sugar futures options. An example of this trade would be selling the July Sugar 16-cent calls. With July Sugar trading at 13.63 as of this writing, the July 16 calls could be sold for about 0.17 points, or $190.40 per option, not including commissions. The premium received would be the maximum gain on the trade and would be realized if July Sugar is trading below 16.00 at option expiration in June. Given the risk involved in selling naked calls, traders should have an exit strategy in place should the trade move against them.
Technicals
Looking at the daily chart for July Sugar, we notice the steep sell-off since the middle of February, with only a brief consolidation period in late March and early April. Prices have fallen so sharply that it would take nearly a 7-cent rally to reach the 100-day moving average, which is currently near the 20.59 area. The 14-day RSI has moved into oversold territory, with a current reading of 27.36. The next support point for July Sugar is seen at 13.10, with resistance found at the 20-day moving average near the 15.85 area.
Mike Zarembski, Senior Commodity Analyst
