During the past two weeks, the price of sugar has risen substantially, with the ICE futures contract reaching 23.33 cents a pound on Wednesday, August 12, the highest the commodity has been in nearly 28 years.
The rising price can be attributed to simple supply and demand economics; there is a shortage. The world’s largest consumer of sugar, India, has experienced very dry weather during the monsoon rain season. This will make India a net importer of sugar and raise the world price. In addition, the world’s largest producer of sugar, Brazil, is currently experiencing too much rain and is expecting a poor harvest.
Inventory levels across the world are being depleted at a staggering rate. According to a recent Reuters article, many of the largest food companies in the United States, including Kraft and General Mills, believe that “[the U.S.] will virtually run out of sugar” if the most recent USDA forecast is accurate.
Although sugar is becoming a more scarce resource everyday, many believe that speculators are to blame for the rapid rise in price. Bears are starting to enter the market as they believe the price of sugar has overshot the fundamentals. We are starting to see a pullback now.
At the current price, it can be expected that existing producers will expand and there will be new entrants. Bloomberg notes that India sugar cane production will increase 52 percent in the 2010-2011 season. Also, sugar is very top heavy from a technical view and extremely overbought.
With sugar up 91 percent year-to-date, I think it looks like a good time to take money off the table if you have been long this market. However, sugar is only one third of the way up to its record high price of 66 cents in the mid-1970s, which I see as still a lot of possible upside potential.
Sugar will definitely be a hot topic in the coming months, and an important commodity for all traders to follow.
Drew Shaw is a Junior Market Strategist based in Toronto with Lind-Waldock , a division of MF Global Canada Co. He is accepting clients from Canada and can be reached at either 877-840-5333 or 416-369-6197, or via email at dshaw@lind-waldock.com. Drew works with Senior Market Strategist Aaron Fennell, who can be reached at afennell@lind-waldock.com, and Senior Market Strategist Wendy Thompson, who can be reached at wthompson@lind-waldock.com.
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