Sugar Continues To Dissolve
Summary
- A bear market since October 2016.
- A weekly close below 11 cents per pound.
- Glut conditions and a weak Brazilian currency sends sugar lower.
- A long-term pattern in danger.
- The bottom of a pricing cycle means risk/reward favors the upside.
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Sugar is a staple commodity that is an ingredient in candies, cakes, jellies, and other foods we consume on a daily basis. Technology has created the ability to produce fuel from the raw form of the sweet commodity. In Brazil, the world's leading producer of sugarcane, sugar-based ethanol powers automobiles and has made the South American nation the world's leader in ethanol exports.
Sometime around 8000 BC, the people of the South Pacific island of New Guinea first domesticated sugarcane. In 500 AD India became the first location where sugar in a solid form became popular. Greek and Roman civilizations used sugar for medicinal purposes rather than as a food additive.
In 1747, German chemist Andreas Marggraf identified sucrose in the sugar beet root, which established a new source for the sweet commodity. Therefore, sugar production moved from only tropical climates that support the growth of sugarcane to more temperate growing locations. While there is lots of evidence that sugar consumption contributes to a host of medical problems including diabetes and other ailments, the soft commodity continues to be a primary food essential in today's world.
The price of sugar can be highly volatile. Many producing countries support local sugar producers via subsidies and tariffs on imports. However, sugar trades in the free market on the Intercontinental Exchange and the weather and crop conditions in critical growing areas around the world can cause massive swings in the price of the agricultural product. Since 1971 the price of sugar has traded from lows of 2.29 cents to highs of 66 cents per pound.
A bear market since October 2016
In August 2015 the price of nearby sugar futures on the ICE Exchange traded to lows of 10.13 cents per pound under the weight of oversupply of the sweet commodity. Sugar made a low at a time when many other raw material prices were falling. At the end of 2015 and in early 2016, many commodities prices found significant bottoms, but sugar was one of the first to reject lows in the summer of 2015 as the low price turned a glut into a deficit, and the price began to rise. 
Source: CQG
As the pre-November 2016 weekly chart shows, the price of sugar futures exploded to the upside moving from 10.13 cents to highs of 23.90 cents per pound in October 2016. The price of the sweet commodity more than doubled in value in fourteen months in what was a one-way move from February through October 2016.
Meanwhile, the supply and demand deficit in the sugar market that propelled prices to the upside turned to a glut again as the price of free market sugar eclipsed the 20 cents per pound level. The rising price encouraged increased production and sugar rose to an unsustainable level. 
Source: CQG
The post-October 2016 weekly chart shows that gravity and supply and demand fundamentals took over in the sugar futures market causing the price to fall to levels close to the August 2016 bottom which currently stands as critical support for the soft commodity.
A weekly close below 11 cents per pound
On Friday, August 3 the price of nearby October sugar futures settled at around the 10.85 cents per pound, only 0.72 above the August 2015 bottom. 
Source: CQG
The weekly chart shows that open interest, the total number of open long and short positions in the ICE sugar futures market has been increasing and reached a record level as the price of sugar fell to its most recent low last week at 10.37 cents per pound on the nearby futures contract. Rising open interest and a declining price of a futures market is typically a validation of a bearish price trend. However, sugar did not need validation as the price action spoke for itself. Meanwhile, price momentum remains in a bearish trend but is approaching oversold territory on the weekly chart.
The price below 11 cents per pound is terrible news for those looking for a recovery in the price of the sweet commodity as the price of sugar has moved lower in seven of the last nine weeks, and the price is dangerously close to its critical technical support level at the August 2015 bottom.
Glut conditions and a weak Brazilian currency sends sugar lower
Two factors have weighed on the price of sugar and have caused it to dissolve like a lump of the sweet commodity in a hot cup of coffee. Increased production from the world's leading free-market sugar producing nations, Brazil and India have resulted in a glut of sugar supplies. Additionally, the recent decline in the value of the Brazilian real has caused the domestic price of sugar to outperform the world dollar-based price adding to selling pressure. 
Source: CQG
As the weekly chart of the Brazilian real versus U.S. dollar currency relationship illustrates, the real was at just over the 0.32 level in October 2016 and has dropped to 0.2687 on August 3. While the price of sugar declined by 56.6 percent over the period, the real lost 16% of its value, partially offsetting the loss in the sweet commodity for the Brazilian producers. However, the real fell from 0.32 in January 2018 to its current level while the price of sugar declined from the 15.37 cents per pound level, a drop of 32.5 percent. Therefore, the most recent drop in the price of the real had a much greater impact on the Brazilian growers and significantly offset the losses in the dollar-based sugar price in 2018. Local production costs in Brazil are in local currency, so it is likely that the cost of bringing sugarcane to market moved lower with the value of the real.
A long-term pattern in danger
The long-term price picture in the sugar market suggests that we are coming close to a significant bottom that would negate a bullish pattern that has been in place for more than three decades. 
Source: CQG
As the quarterly chart shows, the price of sugar has been making higher lows since 1985 when the price hit its record low at 2.29 cents per pound. The next low came in 1999 at 4.36 cents followed by a bottom of 4.97 cents in 2002. In 2004, sugar reached a low of 5.27 cents, and the next nadir came in 2007 at 8.36 cents per pound. Sugar has not traded below the 10 cents level since 2008, and critical technical support now stands at those August 2015 lows at 10.13 cents which was the next consecutive bottom in the sugar futures market.
The slow stochastic, a price momentum indicator on the quarterly chart shows a bearish trend, but it is approaching the level that has triggered significant price recoveries in the sugar futures market over past years and decades. To keep the bullish pattern that has been in place since 1985 intact, nearby ICE sugar futures will need to hold the 10.13 cents per pound level. The sweet commodity could get some help from the economics of sugar's pricing cycle.
The bottom of a pricing cycle means risk/reward favors the upside
Commodity prices tend to decline to levels where production slows, inventories begin to fall, and demand increases. In August 2015, it was the pricing cycle that caused the price of sugar to reverse to the upside and over double in price in a little over one year.
We are now facing a similar situation as we move into August 2018. However, this time, the power of demand could be stronger than it was in 2015.
The price of crude oil was trading at below the $50 per barrel level in August 2015 while today the price is above $68 per barrel. A higher price for crude oil and oil products means that demand for ethanol in Brazil and around the world has increased which increased the demand for sugar which is the primary ingredient in Brazilian ethanol production.
Moreover, the low price of sugar is not encouraging more production these days; in fact, it is likely to lead to a decrease in output over the coming months. Finally, at such low prices, overall global demand is likely to move higher as consumers tend to step up purchases at low prices. Therefore, there is mounting evidence that sugar is close to or at the bottom end of its pricing cycle.
There is a chance that the price of sugar may break to a new low below the 10.13 or 10 cents per pound level on the nearby ICE futures contract. However, I would view any continuation of selling that takes the price lower as a sweet buying opportunity in this commodity that is at the bottom end of its pricing cycle.
The most direct route for an investment or trading position in the sugar market is via the futures and options offered by the Intercontinental Exchange. For those who do not venture into the leveraged world of futures, the two products available via stock exchanges are the SGGB ETN and the CANE ETF products. I prefer the CANE product as it does a good job replicating the price action in the sugar futures market and, as an ETF, it is not subject to the credit of the issuer of the note. Therefore, the ETF removes one level of risk and allows the buyer to take the risk of the price of sugar alone. 
Source: Barchart
Since 2011, CANE traded in a range from $6.75 to $26.43 per share. On August 3, it was trading at $6.99 per share near its low. With almost $15 million in net assets and average daily trading volume of over 62,000 shares, there is liquidity in the CANE product for small positions.
The price of sugar has continued to dissolve, but the sweet commodity is at or close to the bottom end of its pricing cycle. While it is virtually impossible to buy the bottom of a market on a long-term basis, the evidence in sugar these days is that it is a lot closer to lows than highs and risk/reward favors the continuation of a long approach to the sweet commodity.
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This article was written by
Andy spent nearly 35 years on Wall Street, including two decades on the trading desk of Phillip Brothers, which became Salomon Brothers and ultimately part of Citigroup.
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Andy’s writing and analysis are on many market-based websites including CQG. Andy lectures at colleges and Universities. He also contributes to Traders Magazine. He consults for companies involved in producing and consuming commodities. Andy’s first book How to Make Money with Commodities, published by McGraw-Hill was released in 2013 and has received excellent reviews. Andy held a Series 3 and Series 30 license from the National Futures Association and a collaborator and strategist with hedge funds. Andy is the commodity expert for the website about.com and blogs on his own site dynamiccommodities.com. He is a frequent contributor on Stock News- https://stocknews.com/authors/?author=andrew-hecht
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