We’ve spoken repeatedly about the value of food commodities throughout this year. However, the sugar market supply will most likely outpace demand this year. The sugar market is quickly replenished with multiple harvests per year. The quick growth cycle combined with more normal weather patterns in the primary producing regions should see this year’s crop make up for the last two years of deficit production.
The sugar market was 2010’s most volatile market on a percentage basis. Using the stock market and gold as a comparison, gold would have had to reach $3,300 per ounce to match sugar’s rally for the year and the Dow Jones Industrial Average would have had to fall to 4172 to match sugar’s decline. Given this type of volatility it’s easy to see why we look to the commercial traders’ actions to establish a sense of value in the markets. These are the traders who focus solely on their market and build their business plans around their ability produce sugar or, turn it into a finished product.
Commercial traders have been exceptionally good at picking out the major turns in this market and thanks to the Commitment of Traders Reports, their actions are easy to trace. Commercial traders were active buyers as the market traded down to $.20 cents per pound in early May. Since then, the market has rallied more than 50% to over $.30 cents per pound. Remember, we said sugar is a volatile market. This move higher has been fueled by two factors. First of all, the refining margins on raw sugar have been exceptionally high. This brought in quite a bit of recent demand but will subside as the spread between raw and refined sugar narrows due to increased production. Secondly, there has been significant speculative money put to work on the long side of the market with investment coming from small traders, funds and managed money.
The rally in sugar may be running its course as the spread between raw and refined sugar tightens and the commercial traders see this market as more and more overvalued. Through analysis of the weekly COT reports, we can see that ownership of long positions is shifting from commercial, value based buying and into the hands of speculative buyers. Last week commercial traders sold more than 14,000 contracts, which were almost directly bought by managed money and swap dealers.
The shift to a speculative stance in this market could leave it vulnerable to a sell off if the fundamentals hold steady. Production in Brazil, Thailand, Russia, France and India all appear to be near all time highs. Much of this is due to extra planting based on the high prices received last year. A rising tide may float all ships but an overloaded one will still be the first to sink.
This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.
