All Eyes on Brazil
Fundamentals
Sugar futures continue to hold near the 28.50 level, as skepticism builds among traders regarding whether the 2010-2011 surpluses will meet current estimates. After two years of deficits, the global supply of the sweetener has been stretched extremely thin. The deficits have also caused both end-users and speculators to become extremely reactionary and plan for the worst. The estimated surplus has already been cut numerous times due to inclement weather conditions in Brazil, Pakistan, Russia, India and Australia. The Brazilian crop is of major concern for many traders, as that nation is the world's largest Sugar producer and has strong domestic demand for the sweetener in ethanol production. The likelihood of the Brazilian harvest being cut short has increased, and will likely continue to increase with the dry weather. On the flipside, solid rains in Brazil could go a long way towards taking some of the pressure off the market. News that the typhoon that hit China did not damage Sugar cane can be seen as slightly bearish. The movement of the US Dollar and the reaffirmation by central banks that they intend to provide economic stimulus have been extremely supportive of commodity markets, suggesting that overall sentiment in economic conditions may have to tilt to the bear camp to sway Sugar market sentiment towards the bear camp.
Trading Ideas
Internal fundamentals are extremely strong at the present moment, after two consecutive deficits. Many traders have become reactionary to any adverse crop news, suggesting that a large-scale shift to the bear camp may be needed to pressure the Sugar market from the outside. Technically, March Sugar is heading toward a level that proved to be a brick wall the last time it was tested. For this reason, some traders may want to focus on how the market behaves near the 30.00 level. Failure to break through could provide the bear camp with an opportunity. Some traders may wish to enter into a bearish strategy with limited risk and relatively low cost, such as a bear put spread, if the market fails to push through.
Technicals
Turning to the chart, we see the March Sugar contract consolidating in a very tight range between the mid 28.00's and low 29.00's. The market may be poised for another test of the 30.00 level. The last time the front-month contract tested 30.00 was at the end of January of this year. The market was unsuccessful and pulled back sharply. A solid confirmation above 30.00 would send the Sugar market into uncharted territory and could squeeze out shorts. Failure to break through 30.00 could trigger profit-taking and long liquidation.
Rob Kurzatkowski, Senior Commodity Analyst
