Sugar Prices Fly to 2-month Highs!
Friday, January 20, 2012
Though Sugar futures have turned positive on a technical basis, the still large surplus expected this year combined with the potential for larger export quantities from India, may weigh heavily on prices, especially if the European debt situation continues to linger and much of Europe falls into a recession. Traders looking for the Sugar rally to stall may wish to explore selling out of the money call options in Sugar futures options. For example, with March Sugar trading at 24.84 as of this writing, a possible trade idea would be to sell the March 26.50 calls for about 0.23 or $257.60 per contract, not including commissions. The premium received is the maximum potential gain on the trade which would be realized at option expiration in mid-March should the March futures be trading below 26.50.
Fundamentals
Sugar futures prices have awoken from their nearly 2-month long slumber, as the lead month March contract approaches the 25-cent level for the first time since November. Weakness in U.S. dollar, and signs of an improvement in the global economic environment, are among the reasons given for higher Sugar prices of late, despite a global surplus this year. Another more offbeat catalyst may be coming from Brazil, which has become the leading importer of U.S. ethanol. This is important as Brazil is the largest producer of Sugar Cane which can be used more efficiently for ethanol production than U.S. produced Corn ethanol. So the fact that Brazil is coming to the U.S. for ethanol may be a sign that more cane will be dedicated towards fuel usage in the coming months, which will limit the amount of Sugar available for export. Larger Sugar exports out of the Philippines have been met by eager Asian buyers such as Japan, South Korea, and most importantly China, which has been seen restocking several commodities in the past weeks. For the rally to really take hold we will need to see continued strong demand as countries that are holding large Sugar surpluses, such as India, will be eager to allow higher quotas for Sugar exports which will increase supplies available to the market and potentially cap further price rallies.
Technical Notes
Looking at the daily chart for March Sugar, we notice prices breaking out of the 2-month long consolidation phase as well as closing above the downtrend line drawn from the 2011 highs. The 14-day RSI has turned positive with a current reading of 61.38. Two technical barriers remain for Sugar bulls, with psychological resistance found at 25.00 and more importantly the 200-day moving average, currently near the 25.24 level. Support is seen at the 20-day moving average, currently near the 23.64 area.
Mike Zarembski, Senior Commodity Analyst
