Uncertainty Over Supplies May Keep Sugar Price Volatile
Today's Idea
The potential for world Sugar supplies to move back into a surplus this year could send Sugar futures prices sharply lower and put an end to this historic bull market run. Some traders expecting Sugar prices to fall may wish to explore selling July Sugar futures below the recent lows of 26.65 on a stop, with a potential price target of the major support area at the November 17th low of 20.22. Traders may want to limit the risk on this trade by placing a buy stops above the contract high of 29.75.
Fundamentals
Sugar futures traders need to be a hearty lot, as volatile price swings have been the norm during the past several months. Multiple years of world Sugar supply deficits have been behind Sugar's price rise to over 30 cents per pound, but there is some hope that the market may return to a surplus in 2011. High Sugar prices have been the catalyst for increased production estimates, with analysts expecting increased Sugar output from both India and Brazil this year. However, Mother Nature has not been kind to the Sugar growers in Australia, where devastating floods are expected to sharply lower production from the 3rd largest Sugar exporter. Current estimates are for Australia to produce 3.5 million metric tons the next crop year, which is down over 1 million metric tons from earlier estimates. The demand outlook remains mixed, as high world Sugar prices may curtail demand from some importing countries. Given the tight supplies the past few years, however, even normally price sensitive buyers may be forced to buy, even at current high prices, to guarantee supplies should this year's output fail to meet estimates. However, if Sugar production does live up to expectations, the days of 30 plus cent Sugar may be nothing but a memory later this year.
Technical Notes
Looking at the daily chart for July Sugar, we notice prices moving higher since the intermediate low at 20.22 was recorded back on November 17th. During this time, the 14-day RSI has failed to make a new higher reading, creating a long-term bearish divergence in this momentum indicator. The market staged a major reversal on February 3rd, as prices made a new-contract high but ended the day sharply lower. Since that time, the market has moved sideways, holding close to the 20-day moving average. Prices need to hold above the uptrend line drawn from the November 17th low, and a close below this trendline has the potential to trigger a run of sell stops as weak longs run for the exits. The recent low at 26.65 should act as support for July Sugar, with the contract high of 29.75 the next level of strong resistance.
Mike Zarembski, Senior Commodity Analyst
