In the past two weeks we have seen sugar trade at prices that we haven’t seen in more than 25 years. In my opinion, this market is due for a big correction. How does this type of escalating price action occur? No, it’s not just the speculators! It is a combination of fundamental and technical factors.
The futures market is just doing what it’s supposed to do. The market is warning producers and users that the supply has gotten too tight. This is a fundamental factor. India did not get enough rain during their monsoon season, and Brazil, on the other hand, has had too much rain. Brazil and India are the biggest producers in the world of sugar. Shortages there mean tight supplies throughout the world. 
On August 25, sugar futures for October delivery traded near 22 cents a pound on the ICE Futures Exchange. Once the price of October sugar broke out above 18 cents, the technical traders really stepped up and the market continued to rally almost non-stop to 23.33 on August 12, and then 23.32 on August 13. That could be a double top, but we won’t know for sure until it’s over.
You could also argue that the price of sugar has been too low for too long. When prices hover around the cost of production for more than a season or two, farmers turn to alternative crops, and less sugar gets planted.
For the past two years, sugar has traded between 11 and 16 cents, while most other commodities reached historical highs. Now that sugar has been driven to these lofty levels, it will attract more acres, which should begin to increase supply.
I think that sugar will head lower from here, but I would caution you about fighting the trend. After all, the market doesn’t always do what you think it should do. So make sure that you practice good risk management. In other words, make sure that you use stops or limited risk option strategies when you position yourself in this market.
This market is due for a big correction, but you need to be careful since it has been trending strongly higher, and trends can continue for a longer than perhaps they should. One way to limit, or define, your risk would be to buy the March 19.00 puts for approximately $1,000 each. If you are already long sugar, I recommend you take profits. There are also a number of other strategies available depending on your risk tolerance. If you’d like to discuss a more specific trading strategy, feel free to call me directly at 800-231-7811.
Frank J. Cholly is a Senior Market Strategist with Lind Plus. He can be reached at (866) 231-7811 or via email at fcholly@lind-waldock.com.
You can hear market commentary from Lind-Waldock market strategists through our weekly Lind Plus Markets on the Move webinars. These interactive, live webinars are free to attend. To sign up, visit https://www.lind-waldock.com/events/calendar.shtml. Lind-Waldock also offers other educational resources to help your learn more about futures trading, including free simulated trading. Visit www.lind-waldock.com.
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