Sugar Surpluses on the Way Out?
Thursday, January 19, 2012
The current Sugar surpluses may be on the way out, replaced with a supply shortage in the future. Growing conditions remain an unknown, but food and ethanol demand is on the rise, suggesting conditions would have to be ideal to meet 2012/2013 demand. Technically, the March Sugar contract appears to have found a bottom, but the market has yet to catch upward momentum. Traders may look to enter into a bullish to neutral trade, such as a short March 22.50 put position at a premium of 0.30, or $336. The trade's max profit is the initial credit and it has unlimited loss potential, so the position will need to be managed.
Fundamentals
Sugar futures seem to have found a base just above the 22.50 level, after selling off from the 30.00 mark. The supply shortage of several years ago has had farmers planting Sugar cane at a brisk pace, leading to a supply glut in the near-term. The supply surplus was also aided by favorable growing conditions, which is something that growers cannot control. Traders' focus now lies on whether or not growing conditions will once again cooperate in India and Brazil. Sugar food usage continues to increase at an impressive rate. Brazil continues to import a significant amount of ethanol, suggesting that, when the current crop comes to harvest, a large portion could be diverted to ethanol use.
Technical Notes
Turning to the chart, we see the March Sugar contract forming a bottom near the 22.50 level. The 20 and 50 day moving averages appear to be on the verge of crossing over to the upside, which can be seen as bullish in the near-term. The market may be able to gain upward momentum in the event that prices are able to breach the 25.00 level and the 100 day average just above this level.
Rob Kurzatkowski, Senior Commodity Analyst
