The sugar market has consolidated near 28 1/2 year highs since early August, as the sharp drop in sugar production in India due to poor monsoon rains has been expected to cause a major production deficit for India and for the world for the second year in a row. The enclosed chart shows the change in world ending stocks each year since 1980. It illustrates the major reduction in supply for the 2008/2009 season. The sharp drop in India, smaller than expected output from China, the US and Mexico, and a continued decline in sugar production from Europe could result in another 6-8 million tonnes deficit for the coming year. While prices have already rallied to historic highs, which should encourage higher production for next year, this year’s drawdown should still help support a higher price trend into early 2010.

In early August, traders were assuming that India production would come in near 16-17 million tonnes compared with the May USDA estimate of 20.75 million tonnes and consumption thought to be near 23 million tonnes. Last week, revised estimates near 14 million tonnes failed to provide much support to the market, but if they prove to be true, it would just add to the need for India to be a major importer. Brazil has a bumper cane crop, and a larger percentage has shifted to sugar production and away from ethanol production this year, but the pace of harvest was very slow in June and July due to too much rain. Some progress was made in August, but September rains have been higher than normal, and time is running short before the rainy season interrupts any further harvest progress until next spring. If the production and export pace were to fall behind the “bookings” pace, the cash markets could tighten considerably.

Mexico is expected to be a more aggressive importer for the 4th quarter, and traders see tightening supply in Russia leading to higher imports for them as well next year. Demand is likely to be pinched somewhat this year due to high prices and due to higher taxes on soda pop in the US. But there is also a health food push for more sugar to be used in place of high fructose corn syrup, and this may help balance the impact on demand in developed countries. However, high international prices are likely to pinch demand in developing countries.

Any sign of increased rains for Brazil in the near term is likely to lead to a tighter supply and a resumption of the uptrend in futures. Trend-following fund traders have reduced their near record net long position by 45,000 contracts in the last several weeks to around 89,000, so the market would not be considered “overbought.”

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Suggested Trading Strategies:

* Buy March sugar at 21.44 with an objective of 27.89. Risk the trade to 20.25.
* As an alternative, buy a December sugar 23.00 put at 1.65 and buy March sugar futures at the market. In addition, sell the December sugar 25.00 call at 1.17. This strategy would limit the upside potential on the trade but also help define the risk. If the market does pull back to near 21.44, the trader will be in a position to lift the call or both options and hold the futures for a resumption of the trend. Risk a total of 0.55 on the trade.

If you’d like to further discuss these strategies to determine the best execution strategy for you, contact Daniels Trading.

Courtesy of:
Daniels Trading

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