Compared to several other commodity markets, Sugar futures have held their bullish tone lately, due to concerns that Brazilian sugar cane production will be lower than expected due to dry conditions as the growing season nears the end. However, some recent changes in fundamentals might be signaling a price correction could be near. The back-up of ships at Brazilian ports is beginning to ease, which should allow Sugar supplies to reach buyers, helping to elevate current tight supplies. In addition, world Sugar supplies are expected to return to a surplus this season, with the International Sugar Organization expecting a Sugar surplus of just over 3 million tons in the 2010/11 marketing year. Production out of India, the world's largest Sugar consumer, is expected to increase sharply after two consecutive years of well below normal production. Although Sugar demand from Russia and other Asian countries is expected to increase, the production gains expected this year look to be sufficient to meet any expected increases in demand. Speculative traders are still holding a large net-long position in Sugar, with the most recent Commitment of Traders report showing both large and small speculators net-long a total of 158,253 contracts as of August 24th. Although the net-long position is far short of the record 303,210 contracts speculators held back in early 2008, it is still a formidable position, and should prices begin to decline, long liquidation selling could spark a test of support near the 17.50 area.
Some traders looking for weakness in Sugar prices who wish to limit their potential risk may wish to explore trading strategies using options on Sugar futures. One example would be buying a bear put spread, such as buying the October Sugar 19.50 puts and selling the October Sugar 18.50 puts. With October Sugar futures trading at 19.74 as of this writing, this put spread could be purchased for about 0.40 points, or $448.00, not including commissions. The premium paid would be the maximum potential risk on the trade, with a potential profit of $1,120 minus the premium paid which would be realized if October Sugar is trading below 18.50 at option expiration in September.
Looking at the daily chart for October Sugar, we notice prices holding just above the 20-day moving average. The market seems to be consolidating within a narrow 1-cent per pound range, as volume remains relatively light ahead of the Labor Day holiday in the U.S. There appears to be a bearish divergence forming in the 14-day RSI, as this indicator failed to make a new high reading despite prices reaching 5-month highs last week. The August 25th high of 20.37 looks to be near-term resistance for October Sugar, with support found at the August 10th low of 17.51.
Mike Zarembski. Senior Commodity Analyst