Too Much Sugar!
Wednesday, December 21, 2011
Though we may see bouts of buying in the Sugar futures market in the coming weeks, it may be difficult for any rally to be sustained given the rather bearish supply fundamentals seen in 2012. Some traders may perhaps wish to use any short-term rallies to explore buying bear put spreads in Sugar futures options. For example, with March Sugar trading at 23.67 as of this writing, the March 23 puts could be bought and the March 22 puts sold for a 0.34 debit, or $380.80, not including commissions. The investment in the put spread would be the maximum potential risk on the trade, which has a potential profit of $1,120 minus the premium paid which would be realized at option expiration in February should the March futures be trading below 22.00.
Fundamentals
Sugar prices appear headed toward their 2011 lows, as a potential for record production this season is keeping the bears in charge. Prices may have remained elevated throughout most of this year as traders focused on disappointing production totals out of Brazil, which is the world's leading Sugar producer. However, huge production out of India, Thailand, and Europe is more than expected to make up for Brazil's output. Analysts are now increasing their estimates for a global Sugar surplus, with some forecasters calling for a 6 million ton plus surplus in the 2011/12 season. Should prices continue to head lower, we may start to see some Brazilian cane move towards Ethanol production, instead of for food usage. This may bring some support to the Sugar market, but it may take a move below 20 cents per pound before any major shift takes place. Many traders will continue to watch the events unfold out of Europe, as EU leaders try to stem the economic malaise caused by the sovereign debt crisis. Any signs of further economic deterioration could spell further weakness in commodity prices in general, with Sugar being especially hard hit given its current bearish fundamentals.
Technical Notes
Looking at the daily chart for March Sugar, we notice Tuesday's rally, which was triggered by a return to "risk" assets by traders following a successful Spanish T-bill auction and improved German business sentiment, sent prices above the 20-day moving average. The 14-day RSI has moved from an oversold reading to a more neutral stance, with a current reading of 48.30. Though the short-term outlook has improved, Sugar bulls have a rough road to higher prices, especially with strong resistance found at the 200-day moving average, as well as at the down-trend line drawn from the August 24th highs which lie above the 25.00 level. Near-term resistance is found at the December 7th high of 24.25, with support found at the December 15th low of 22.62.
Mike Zarembski, Senior Commodity Analyst
