Sugar’s Price Rebound May Be Stalling

(Daily Market) – Some traders who are bearish on Sugar but who wish to limit their risk to their total investment in a trade may perhaps wish to explore the purchase of a bear put spread in Sugar futures options. For example, with July Sugar trading at 20.43 as of this writing, the July sugar 20.50 puts could be bought and the July 19.50 puts sold for a net debit of 0.40, or $448 per spread, not including commissions. The total investment in the trade 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 June should the July futures be trading less than 19.50.

Fundamentals

After successfully testing major psychological support at 20.00, July Sugar futures prices have rebounded modestly, but additional gains may be hard fought. First we have the start of the Brazilian cane harvest, with ships lining up at Brazilian ports expected to load 1.2 million metric tons of Sugar. Though Brazil’s harvest is expected to be lower this season, huge supplies out of India and Thailand are expected to more than make up any Brazilian shortfall. In addition, continued concerns about the health of the global economy and slower growth prospects out of China are expected to aid in forming a global Sugar surplus this coming season. Technically, prices have been correcting from oversold levels, with large speculators having already liquidated much of their net-long positions during the past couple of weeks. The non-commercial net long position has fallen to only 61,148 contracts as of May 8th, according to the most recent Commitment of Traders report. This is only ¼ of the net-long position seen during the commodity-wide bull market back in 2008, and is a signal that speculative interest is moving out of Sugar and into other markets. If that is the case, commercial traders may start to play a greater role in the market’s direction, especially if hedge selling increases as the South American harvest progresses.

Technical Notes

Looking at the daily chart for July Sugar, we notice prices failing to close above the 20-day moving average during the mini rally this past week. This failure may negate the “V” bottom formation that appeared last week. The 14-day RSI has turned lower, with a current reading of 36.56. The May 14th low of 20.07 appears to be support for the July futures, with resistance found at the May 7th high of 21.17

Mike Zarembski, Senior Commodity Analyst