Sugar Consolidates Between 12 And 13 Cents Per Pound
Summary
- A drop below 10 cents for the first time since 2008.
- A recovery takes sugar over 40% higher in one month.
- A dip holds above 11.50 cents.
- Sugar consolidates as each year is a new adventure for production - watch Brazil.
- SGG and CANE for those who do not participate in the futures market.
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Sugar is one of the most volatile commodities that trade on the futures exchange. Since the 1970s, the range in the sweet commodity has been from a low at 2.29 cents per pound to a high at almost twenty-nine times that level at 66 cents. The price of sugar depends on a collection of factors including the weather conditions in critical growing regions around the world. Currency volatility in producing nations can also influence the price. In many countries, governments subsidize sugar production as they view the soft commodity as a staple and essential food product. Changes in government policies can also impact the price of the sweet commodity. Most recently, the price of March world sugar futures was trading at the 12.77 cents level on February 4. Meanwhile, the price of US government subsidized sugar close on the same day at double that price level at 25.55 cents per pound.
The world sugar futures contract on the International Exchange reflects the supply and demand for the sweet commodity around the globe. In 2018, supplies rose to a level that caused the price to move to its lowest level since 2008.
We witnessed lots of volatility in the world sugar futures market over the recent months, and the price variance is likely to continue in 2019. The most direct route for a trade or investment position in the sugar market is via the Intercontinental Exchange. However, the Teucrium Sugar ETF product (NYSEARCA:CANE) and the iPath Bloomberg Total Return ETN product (SGG) do excellent jobs tracking the price of sugar futures.
A drop below 10 cents for the first time since 2008
In August and September 2018, the price of sugar did something it had not done in a decade when the price dropped below the 10 cents per pound level. Critical support had stood at the August 2015 low at 10.13 cents, but the price moved below that level. 
Source: CQG
As the monthly chart highlights, the decline to the lowest price since 2008 caused long-term price momentum to fall into an oversold condition. Sugar found a bottom 0.30 cents lower than the 2015 low at 9.83 cents per pound at which point it turned around and exploded to the upside over one month.
A recovery takes sugar over 40% higher in one month
It took the sugar futures market from January through September to fall from over 14 cents per pound to the low at 9.83 cents. When the price turned higher, sugar moved back above the 14 cents level in just one month.
Source: CQG
As the weekly chart illustrates, the sugar futures market moved from 9.83 cents to 14.24 cents over one month, and by late October it was 44.9% higher than the low in September. The price recovery was a reaction to the decline to what was the bottom end of the pricing cycle in the world sugar market.
The commodity pricing cycle reflects the simple economics of supply and demand. The price of sugar entered a bear market in October 2016 when the price rose to a high at 23.90 cents. Production increased at the higher price, inventories swelled, and demand declined. As the price fell through 10 cents per pound, the prospects for lower production rose, inventories likely began to decline, and demand increased as the price of the sweet commodity was on sale which led to the price recovery. Since the move to the upside of almost 45%, the price of sugar has been trading in a range that is higher than the September low and lower than the October high.
A dip holds above 11.50 cents
The price of March sugar futures declined following the October peak which occurred when the market ran out of buying at higher prices. Since then, sugar backed off reaching a low at 11.69 cents on January 3.
Source: CQG
As the daily chart shows, the price of sugar found a higher low at 11.69 cents and has been trading between the 12 and 13 cents per pound level for the majority of 2019. A move to a high of 13.27 cents on January 16 caused some selling that took the price back to the 12.77 cents per pound level as of Monday, February 4. The midpoint of the move from 9.83 to 14.24 cents stands at 12.04 cents per pound. Sugar is above that pivot point and is consolidating after the end of the bear market and an over 40% recovery. Both price momentum and relative strength metrics are in neutral territory on the short-term chart which is an indication that the period of consolidation is likely to continue. The weekly and monthly charts display a rising price trend which could mean that sugar needs to build a base during this period of consolidation before it moves to a higher high later this year. The potential for a bull market in sugar depends at least two factors over the coming months.
Sugar consolidates as each year is a new adventure for production - watch Brazil
Mother nature is the ultimate arbiter of the path of least resistance of the price of all agricultural commodities and sugar is no exception. Therefore, growing conditions in critical producing areas of the world will determine if the 2019 sugar crop will result in a glut, a shortage, or equilibrium. The world's primary producers of sugar cane are Brazil and India. When it comes to Brazil, their falling currency contributed to weakness in the sugar market in 2018. 
Source: CQG
As the weekly chart shows, the Brazilian real fell from a high at $0.32005 in early 2018 against the US dollar to a low at $0.23725 when sugar was on its way to the lowest price in a decade. The real shed 25.9% of its value at a time when sugar fell from 15.37 cents at the start of 2018 to the low at 9.83 cents or 36%. While the dollar price of sugar lost over one-third of its value from the 2018 high to the low, in Brazilian real terms, the fall was only 10.1% which meant that growers continued to produce the sweet commodity at a profit throughout the year in domestic terms. Brazilian sugar producers and millers have costs in their local currency, so as the price of the real dropped, their output costs in US dollar terms moved lower which softened the blow of the bear market in the sweet commodity.
Any crop problems that cause supplies to fall short of demand expectations or a rise in the Brazilian real which would increase output costs for local producers would likely support the price of sugar over the coming weeks and months. In Brazil, a new government led by President Jair Bolsonaro has pledged to clean up corruptions and get the economy back on track. If the Bolsonaro administration achieves success, the real will likely rally against the dollar which would be a bullish sign for the price of sugar futures in US dollar terms. The currency has made some progress on the way to a recovery and was trading at the $0.2722 level on February 4.
SGG and CANE for those who do not participate in the futures market
I am optimistic about the potential for higher highs in the sugar futures market in 2019. For those who do not trade in the futures market, one alternative is the iPath Bloomberg Total Return ETN product. The fund summary for SGG states:
The investment seeks return linked to the performance of the Bloomberg Sugar Subindex Total Return. The ETN offers exposure to futures contracts and not direct exposure to the physical commodities. The index is composed of one or more futures contracts on the relevant commodity (the 'index components') and is intended to reflect the returns that are potentially available through (1) an unleveraged investment in those contracts plus (2) the rate of interest that could be earned on cash collateral invested in specified Treasury Bills.
SGG has net assets of $23.98 million and trades an average of 6,786 shares per day as the product that replaced SGGB is building liquidity. The SGG product was not trading during the September to October 2018 rally in the sugar market, but SGGB did an excellent job replicating the price action in the sugar futures market. As an ETN, there is an added risk for investors who hold SGG as the performance of the product depends on the issuer's ability to meet obligations. Therefore, the credit risk of the issuer is a consideration when it comes to this product.
The Teucrium Sugar ETF product does not have the same credit risk as it holds positions in the sugar futures market to replicate price performance. The fund summary for CANE states:
The investment seeks to have the daily changes in percentage terms of the shares' NAV reflect the daily changes in percentage terms of a weighted average of the closing settlement prices for three futures contracts for sugar that are traded on ICE Futures US. The fund seeks to achieve its investment objective by investing under normal market conditions in Benchmark Component Futures Contracts or, in certain circumstances, in other Sugar Futures Contracts traded on ICE Futures or the New York Mercantile Exchange ('NYMEX'), or on foreign exchanges.
The most recent holding in the CANE ETF include: 
Source: Yahoo Finance
CANE spreads its risk on the long side of the sugar market between three actively traded futures contracts which makes the ETF underperform when sugar is rallying and keep pace or outperform during price corrections. Sugar rallied by 44.9% from September through October last year. 
Source: Barchart
As the chart shows, CANE moved from a low at $6.46 in late September to a high at $8.15 per share in October, a rise of 26.2%. CANE has net assets of $10.78 million and trades over 30,000 shares each day.
Both CANE and SGGB are likely to reflect the price action in the sugar futures market over the coming weeks and months. SGGB already has higher net assets that CANE and that is likely to continue. However, as an ETF product, there is no credit risk from the issuer with the CANE product.
In the sugar market, investors and traders have options when it comes to the ETF and ETN products that move with the price of the sweet commodity. Keep your eyes on the Brazilian real over the coming days and weeks as it could hold one of the keys to the path of least resistance for the price of sugar in 2019.
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