Bottom Near In Sugar?

Summary

• We think so. High crude oil prices incentivize the use of ethanol as a gasoline additive in the U.S. and as a substitute for gasoline in Brazil.
• The U.S. uses its huge corn crop to make ethanol. Brazil uses its huge sugar crop to do the same thing.
• Brazil has a whole transportation infrastructure designed to substitute ethanol for gasoline when petroleum is expensive and/or sugar is cheap.

We think the bottom in sugar is near. High crude oil prices incentivize the use of ethanol as a gasoline additive in the US and as a substitute for gasoline in Brazil. The US uses its huge corn crop to make ethanol. Brazil uses its huge sugar crop to do the same thing. RMB Group trading customers who follow our blogs should already be long December 2018 $4.00 and $4.20 corn calls and lightly long sugar by virtue of their fully paid for October 15-cent sugar calls.

Brazil has a whole transportation infrastructure designed to substitute ethanol for gasoline when petroleum is expensive and/or sugar is cheap. With both Brent and WTI crude at 3-year highs and sugar nearing 3-year lows, we expect the substitution of ethanol for gasoline to pick up steam in Brazil.

Data Source: Reuters

Big supplies – especially from India – have helped to keep a lid on the market, but recent price action is encouraging. Sugar closed higher than the previous day’s high for the second consecutive session yesterday. We think this is an early signal that the bears are getting tired.

Sugar is close to support at 10.13 cents, very oversold on both a daily and weekly basis and overdue for a substantial upside correction that has the potential to grow into something more with a little help from Brazilian ethanol demand. Consequently, we believe the time has come to add to our marginally long sugar position.

Data Source: Reuters

Low volatility in the sweet stuff means that March 2019 call options are surprisingly cheap. March 2019 14-cent sugar calls are currently offered at a price of $705.60 each. With 290 days left until expiration and a strike price relatively close to where the March 2019 sugar futures are trading, we believe they are a good buy at current levels. These calls would be worth at least $1,680 should sugar manage to rally to our first objective of 15.50 cents per pound prior to expiration February 15, 2019.

Disruptive weather conditions in any major sugar producer could be enough to power the sweet stuff to our second, longer-term objective of 18.50 cents per pound. Our March 2019 14-cent calls would be worth at least as much as $5,040 should March 2019 sugar futures rally to 18.50 cents in the next 290 days. Failure of sugar to rally above 14-cent per pound by February 15, 2019 would mean a loss of what we paid for our options and all transaction costs, but no more.

The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that R.J. O'Brien believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.