The sugar market has been in a general decline since peaking above $.30 per/lb in the summer of 2011. While the market tried to find some support in 2013 near the $.20 per/lb level, the market was forced to fall as sugar producers ramped up production in an attempt to cash in on historically high prices. The supply glut that this created over the last couple of years is still being worked through. Fortunately, the end of the decline may be near as Brazilian stockpiles peak this month at more than 40-million tons, according to Bloomberg. When we combine the physical action in the sugar market with the actions of the commercial traders and seasonal analysis by Moore Research, we see this decline as being near a multi-year low, with a bigger advantage to be gained on the buy side rather than selling at these depressed levels.
Sugar prices have fallen nearly 40% since this time last year. This begs the question, “Why is this year different?” I believe the first clue lies in the actions of the commercial traders. Their actions have been highly predictive of the futures markets’ movements. Last year at this time, commercial traders were flat to negative on the market. They sold around 90,000 contracts in a sideways market that was trading between $.1675 - $.1725 from the beginning of last March through the end of last April. This year, they’ve added 66,000 contracts at prices more than $.04 lower. Commercial end line users have also boosted their net purchases to the highest levels since July of 2013.
Finally, we move to seasonal analysis by Moore Research that shows a shifting but strong tendency by sugar futures to bottom sometime between mid-April and early May and rally into the July contract’s expiration.
A Trade Idea
Given the sugar market’s propensity for volatility, especially in light of recently low volatility, the best entry technique may be to wait for a volatility breakout.
Entry stops placed in the July contract just above the resistance at $.1310 per/lb would ensure an entry on the market’s first spike to the high side and allow the entry of new long positions to be fueled by the short covering buying of the trend traders.
Once the market turns higher, we expect the first resistance to show up around $.1480 in the July contract. Meanwhile, we’ll continue to monitor this market for a daily setup to match our broader expectations as the sugar market shifts into deficit in 2015.
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