What's Next for World Sugar?

The recent drop in sugar futures was an important signal in the market, and it is one that is long overdue. ICE sugar futures exhibited their largest drop in nearly five years; on Monday, the May contract closed at 12.09 after trading as high as 13.75 last Friday.

Many analysts were making connections to poor performance on Wall Street, but the fundamental situation regarding sugar has been calling for this for a long time. The global supply situation is still in a structural surplus, and even with high oil prices, a surge in commodities open interest and a weak dollar, fair value in this market is still in the 11.75 to 12.5 cent range.

World sugar benefited from the commodities run, and increased on the heels of gains in the grains complex; however, there are supply concerns in wheat, soybeans and corn which are not present in sugar. As we are now in the third year of a global surplus, even with a higher percentage of Brazilian cane going to ethanol, prices above 13.25 cents are not justified.

Despite this pullback, there is still cause for upward speculation not that prices are back in a fair range. Dryness in April is helpful for both current and next year’s Centre-South crop in Brazil, and additional rains can provide some price support. In addition, the Indian Monsoon is forecast to start off better than normal, but the onset will be delayed vs. last year (see the Weather Trends discussions for more details).

Given the current poor soil moisture conditions across India, any delay in the start to the Monsoon this year will be interpreted by producers and traders as a bullish signal. The next downside target is 11.8; if these weather delays do materialize, the next upside target for May futures will be around 13.2.

Disclosure: At the time of this writing, the author does not hold any positions in DB Multi-Sector Commodity Master Trust (DBA) or Market Vectors--Agribusiness ETF (MOO).

Comments

[phdinsuntanning]

Ferrari, speed up to buy some sugar puts !!

[cdcaddy]

I wouldn't count sugar out yet - has any noticed that the forecasted surplus has been revised down several times in the last six months. Also the forecasted 2009 surplus is estimated at 1.9MM tonnes. If the USA will realize that corn based ethanol is a true waste and they do away with the 54 cent tariff on sugar ethanol - then hold on to your sweet tooth...