Sugar’s Moment Of Truth | Seeking Alpha

Sugar is one of the most volatile commodities in the world. Since 1971, the price has traded in a range from highs of 66 cents per pound in 1974 to lows of 2.29 cents in 1985. Over recent years, sugar has not come close to those highs or lows. Since 2000, the price range for the sweet commodity has been from lows of 4.62 cents to highs of 36.08 cents. Interestingly, the low is around double the all-time bottom, and the high is around half the record peak.

Since July 2012, the price of sugar has traded from highs of 24 cents to a low of 10.13 cents. The price of sugar was trading at the 13.50 cent per pound level at the end of last week; it is a lot closer to the lows than the highs when it comes to the trading range over the past six years.

Sugar traded to a low of 10.13 cents in August 2015 and rallied to a high of 23.90 cents on the nearby ICE futures contract in October 2016. The price then headed south once again, falling to a low of 12.53 cents in June of this year. After a brief recovery rally to just over the 15 cent level on August 1, the price failed to build on those gains and has declined since and is now approaching a price level that could be the moment of truth for the sweet commodity.

The sweet commodity turns sour

After the recent rebound that took world sugar futures to a high of over 15 cents per pound, the price has turned south once again. Source: CQG

After trading down to lows of 12.74 on June 28 and 29, which was the lowest price for sugar futures since February 2016, the price recovered to 15.16 cents on August 1. Since then, it has been all downhill for the price of the sweet commodity as it has been dissolving reaching a low of 13.11 cents on the past three trading sessions settling on Tuesday, August 15 at 13.13 per pound on the ICE October futures contract, just two ticks above the lows. Sugar rallied on weather conditions in Brazil, but the price turned to the downside as Brazilian mills accelerated production and more of the output was destined for export rather than domestic ethanol production. In the U.S., the world’s leading corn producer, ethanol is a byproduct of corn. In Brazil, which is the leading producer of cane sugar, the biofuel is a byproduct of sugar.

Critical support is close again

As the daily chart highlights, support for sugar is now at the late June lows at 12.74 cents. Open interest, the number of open long and short position on the ICE sugar futures market, has increased from by over 50,000 contracts since the start of August. Rising open interest and falling price tend to be a validation of a bearish trend in a futures market. The momentum indicator displays a bearish trend, and while it has declined into oversold territory, sugar is fast approaching a critical support level. Source: CQG

On the weekly chart, sugar the critical support level for sugar futures now stands at the February 2016 lows at 12.45 cents per pound. If sugar futures were to fall below that level, the market could be in for a test of the August 2015 lows at 10.13 cents.

The rally gave some producers a chance to hedge

After watching the price of sugar decline in almost a straight line from highs of 23.90 cents in October 2016 to 12.53 cent on the July futures contract before it expired, producers likely took advantage of the price rebound to above 15 cent in early August to lock in or hedge some of their future production. The price rallied by over 20% in a matter of one month which handed some growers around the world in unsubsidized markets the opportunity to sell their output. Meanwhile, one of the biggest challenges when it comes to analyzing the supply and demand fundamentals for markets like sugar are the subsidies government give to producers. Those subsidies result in behavior that defies economics as producers receive additional revenue during times when they should be planting other crops on their land limiting the output of the sweet commodity. However, if the price of sugar keeps falling the chances are that demand will increase.

Inventories will fall at lower prices

Even though the price of sugar is once again falling, the sweet commodity has two things going for it these days. First, the weak U.S. dollar is supportive for all commodities as it is the benchmark pricing mechanism for most raw materials and stables, and sugar is no exception. Second, and perhaps more importantly, the lower the price of sugar falls, the higher the chances that inventories will decline as buying accelerates. Classic economic theory teaches that when the price of a commodity declines, demand increases and production slows at which point inventories begin to fall.

Are we are close to a bottom?

Sugar is a highly volatile soft commodity, and the price tends to extend on the up and downside. Now that the price appears to be heading towards the June lows, at the very least, and could test the 12.45 cents per pound critical support level dating back to February 2016, there are some signs that the downside for the commodity when it comes to the path of least resistance for the price is limited. Source: CQG

The monthly chart highlights that technical metrics that measure momentum and strength have declined into oversold territory, and the last time they were at the present level was back in August 2015 when the world sugar price hit bottom at 10.13 cents per pound. A spectacular rally followed those lows that took the price to a high of 23.90 cents, a rally of over 135% over the course of 14 months. I believe that now is the time to start gently buying sugar on a scale down basis leaving plenty of room to add on the downside. For those who do not tread into the shark filled waters of the ICE futures or options on futures markets, the SGG is an ETN product that does an excellent job replicating price action in the sugar futures market.

Subsidies in the sugar market complicate the process of conducting fundamental supply and demand analysis. However, at the current price and lower, the chances are that inventories will decline as buyers take advantage of the lowest prices since February 2016. Sugar’s moment of truth on a short-term basis will be if the price challenges the 12.45 cents per pound level, but below there, it is likely that fundamental factors will kick in, and the price will find a bottom above the August 2015 lows.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.

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