Is the CRB index looking a little toppy at these levels? You bet it is, and now that the dollar is bouncing back, the commodity markets look like they have plenty of room to retrench from here. Take sugar, for example. Over the last two months, the benchmark futures contract on raw sugar has soared 57% as near-term production in key markets like Brazil fails to keep up with global demand.
This has naturally been bullish for sugar stocks like Cosan (NYSE:CZZ) and Corn Products International (CPO). It is true that the long-term fundamentals for sugar and other "soft" commodities in the agricultural space are extremely bullish. Consumption in emerging markets in particular is already soaring; India, for example, has become the diabetes capital of the world, while sugar shortages in countries like Cambodia and Vietnam are already causing political tension.
But in the short term, it is doubtful that this kind of gain is sustainable as Indian supply comes online for the first time in years. This pattern plays out across the commodity markets: wheat (heavily bought in the wake of the Russian drought), corn (which is becoming a strategic necessity for Beijing) and metals like copper, zinc and aluminum. In all these cases, the long-term fundamentals look good. But for the time being, prices might have gotten a bit ahead of themselves, especially if the dollar gets stronger.
Disclosure: No position