Souring on Sugar?
Today's Idea
The Sugar market has been supported by extremely tight supplies over several years, but sizable crops in Brazil, Thailand and India could quickly ease supply concerns. The sizable fund position is also a concern for long spec positions if a fund liquidation ensues. Technically, July Sugar is in a vulnerable position after confirming a bearish breakout from a wedge and approaching a near-term support level. Some traders may wish to consider a bear put spread, buying the June Sugar 23.50 puts and buying the 22.00 puts for a debit of 0.45, or $504. The trade risks the initial cost and has a maximum profit of $1,176 if the July Sugar contract closes below 22.00 at expiration.
Fundamentals
Sugar futures are entering the Brazilian harvest on a sour note, as futures have been unable to garner any traction. While supplies are tight in the near-term, the looming Brazilian harvest along with good growing conditions in Thailand and India could significantly ease supply concerns. The rain that Brazil has seen as it enters the harvest is a mildly bullish force, but conditions are expected to dry quickly. The sizable spec long position also suggests that selling pressure could quickly garner steam if funds and smaller speculators begin to unwind positions. If energy prices begin to falter, Sugar may lose outside market support. The improvement in Coffee fundamentals could result in some portfolio rebalancing by some traders, possibly resulting in a higher allocation to Coffee at the expense of other soft commodities.
Technical Notes
Turning to the chart, we see the July Sugar contract trading near the relative low close of 23.57. The market also recently broke out of a wedge formation to the downside. The measure of the move suggests prices could come down to test support in the 21.10 area. After the 23.57 level, support comes in at 22.50 and 21.10. The 50-day moving average is closing in on the 100-day average. A downward crossover of the two averages could be seen as a bearish signal over the intermediate term. On the upside, the market would have to cross back above the 26.00 level to regain upward momentum.
Rob Kurzatkowski, Senior Commodity Analyst
