Sour Crop Year
Today's Idea
Sugar supplies remain tight and will likely remain extremely tight going forward, barring a sharp turnaround in weather conditions. The chart appears as though prices may be breaking out, however there has been no confirmation. For this reason, some traders may wish to take a cautious approach and enter into an options spread with limited risk. Some traders may wish to buy the Feb Sugar 33.50 calls and sell the Feb 34.00 calls for a debit of 0.20, or $224. The trade risks the initial debit for a maximum profit of $336.
Fundamentals
The year 2010 may be known as the year of weather related shortfalls for commodity traders. Weather issues have hit Sugar especially hard, as India, Pakistan and Brazil have all been plagued by poor conditions. Pakistan is looking at a domestic shortage of 900,000 metric tons of the sweetener due to heavy flooding earlier this year. The country has upped their import forecast to 700,000 metric tons, but the figure could, in fact, be much larger. The shortages that food and fiber commodities have experienced this year have created a pack-rat mentality among countries that heavily process goods from those materials. Simply put, nations are preparing for a rainy, or sometimes not rainy, day. Pakistan may be low-balling their import figures to avoid driving already high prices even higher. Several years of supply shortages in the global Sugar supply have taken a toll, and it could take much longer to replenish stockpiles. Corn prices are also on the rise, which makes it uneconomical for Sugar users to substitute Corn-based sweeteners. With tight supplies on the horizon and no alternatives, Sugar prices may continue to push to new record levels.
Technical Notes
Turning to the chart, we see the March Sugar contract moving above the contract high close of 33.11 in early trading. If prices hold these levels, it could signal a new breakout. Traders now have to look back to the 1980 price spike to find the next possible resistance level at 36.58. The overbought conditions on the RSI could result in some selling pressure, but new shorts could get squeezed out if this is a true breakout.
Rob Kurzatkowski, Senior Commodity Analyst
