The sugar market has been on a wild ride the past month. The market is shifting from one of the tightest stocks/usage periods on record to a more normal setup for the coming year. But the first leg down may have been too far, too fast. July sugar fell 20.6% off of the February high into the March 2nd low. Open interest peaked at 897,343 contracts on February 4th and had fallen to 741,780 by March 2nd. This massive long liquidation trend leaves the market oversold as of early March.
Looking forward, Brazil’s sugar production should jump 8-10% this year. The crush season should get started in late March/early April, and this should help ease the global supply tightness. On top of the many customers who will be awaiting new crop Brazil sugar, the spike up in ethanol prices inside of Brazil could spark a need for increased ethanol production early in the season. The real key to avoiding another world production deficit for the coming year will be weather in India and China, as both regions have seen sub-par crops the last two years. China production is expected to be near 11 million tonnes in 2010, down from 12.43 million last year.
This could leave a large production deficit for the second year in a row, and China has been selling state owned reserves since late 2009. We would not be surprised if China emerges as a strong importer for the coming year. The US may also be a strong importer in the months just ahead, as stocks are tight. India’s consumption has been about 7 million tonnes above production for each of the past two years, so the market will become very sensitive to production prospects for this year, especially when the monsoons begin in early June.
The technical action turned sour with the daily key reversal on February 1st, and that was reinforced with a 28 year high and sharply lower close for the week ending February 5th. Traditional technical indicators are now oversold, and the sharp drop in open interest suggests the first wave of long liquidation selling may be about complete. However, speculators held a massive net long position at the top and the liquidation process will be tough to stop. Keep in mind that the COT non-commercial and non-reportable combined position (large and small specs) as of February 23rd was still net long 186,603 contracts. This was down 22,219 contracts for the week but still very large.
Trading Strategy:
Buy a May sugar 22.00/23.50 bull call spread for 58 with an objective of 138. Risk 25 from entry. That works out to be a $280 risk for a $1,545 reward. Currently the spread closed at .65.
Keep a pulse on the industry and access more industry news.
About Daniels Trading
Daniels Trading is a relationship-focused commodity futures brokerage located in the heart of Chicago’s financial district. Founded in 1995, they have a history of providing effective and reliable trade executions to both individual traders and institutional investors around the globe. In addition to a focus on relationship and execution, Daniels Trading is a leader in providing ongoing education opportunities and resources for customers.
