Sugar Futures Appear Oversold But Speculative And Hedge Selling May Cap Rallies

April 24th, 2012


Category: Sugar

(Daily Markets) – Though longer-term fundamentals seem to favor the bear camp in Sugar, the recent steep sell-off in prices appears to have moved the market to oversold levels and a near-term price correction would not be out of the question. Some traders remaining bearish on Sugar but who may wish to take advantage of any near-term price bounce may want to explore buying a diagonal ratio spread. Here the trade would be buying a near-the-money put in a further out contract month and selling 2 or more further out-of-the-money puts in a closer expiration month. For example, with July Sugar trading at 21.54 as of this writing, the July 21.50 puts could be bought and 2 of the June 20.00 puts sold for a net debit of 0.68, or $761.60. The goal of this trade would be for Sugar prices to remain steady or even fall moderately in the near-term, but only make a large down move after the expiration of the near-tem options.


Sugar futures have become bitter for commodity bulls, as prices have fallen to lows not seen since May of 2011. A global Sugar surplus is the main reason behind the sell-off, and major Sugar exporters such as Brazil and India are expected to increase exports this marketing year. Recently, the market has received a bit of bullish news, which if true, may signal that prices are becoming oversold. First, we have seen some private forecasters calling for a much lower Brazilian Sugar cane harvest than current government estimates. In addition, the USDA raised the limit for low-tariff Sugar imports by 420,000 tons, as the existing quota has been met much earlier than anticipated. Sugar imports from Mexico, who is the largest supplier of foreign Sugar to the U.S. and not subject to tariffs due to the NAFTA agreement, may be lower than expected, as Mexico’s Sugar output is running 10% lower than last year’s levels, because dry weather has hurt cane yields. In addition, Mexico’s domestic Sugar consumption has increased, leaving smaller supplies available for export to the U.S. Despite the looming bear market in Sugar prices, speculators are still holding a relatively large net-long position, with the Commitment of Traders report showing a combined net-long position by both large and small speculators of 165,140 contracts as of April 10th. This position may help cap any rally attempts as weak longs begin to exit trades on any rally attempts to help cut losses. In addition, it is expected that producer hedge selling may emerge should we get a price correction back towards resistance near the 23.00 price level.

Technical Notes

Looking at the daily chart for July Sugar, we notice prices plunging after the market moved below 23.00 late last week. Though volume soared during this week’s sell-off, we must take note that a good portion of the trading volume involved spreads, as speculators began to roll their positions out of the soon to be expired May contract into July or more deferred contract months. The 14-day RSI has now approached oversold levels, with a current reading of 30.32. We have to go all the way back to May of 2011 to find the next support point, which is the May 17th low of 21.00. Resistance is seen at the 20-day moving average, currently near the 23.19 level.

Mike Zarembski, Senior Commodity Analyst

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