Sugar Sets The Stage For An Encore

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About: Teucrium Commodity Trust - Teucrium Sugar Fund (CANE), Includes: ADZ, AGA, AGF, BRF, BRZU, BZQ, DAG, DBA, EWZ, EWZS, FBZ, FLBR, FUD, JJA, JJS, RJA, SGG, TAGS, UAG, UBR
by: Andrew Hecht
Summary

New lows for 2019 for sugar.

The sweet commodity heads for the 10 cents level.

Memories of September 2018.

Three reasons sugar could repeat last year's action.

CANE for those who do not trade futures.

After trading to a high at 14.24 cents per pound in October 2018, the price of sugar has been dissolving like a cube in a hot cup of coffee. The price of the sweet commodity hit its lowest level of 2019 and since last year at this time last week when it traded to a low at 10.86 cents per pound. In September 2018, the price found a bottom at 9.83 cents, the lowest level in a decade. The decline below the 10 cents level triggered a swift recovery that took it to over 14 cents.

Sugar can be a wild commodity when it comes to price volatility. Since the early 1970s, the price has traded as low at 2.29 cents and as high as 66 cents. The most recent significant low came last September at just under 10 cents. The high came in 2011 when the sweet commodity peaked at 36.08 cents per pound.

Brazil is the leading free-market producer of sugarcane in the world. While lots of Brazilian sugar is absorbed by internal ethanol production, the South American nation is the leading exporter of sugar.

Since last October the price has been making lower highs and lower lows, and it may be on its way for a test of levels below 10 cents per pound. The most direct route for investment or trading positions in sugar is via the futures and futures options that trade on the Intercontinental Exchange. The Teucrium Sugar ETF (NYSEARCA:CANE) product provides an alternative for those who do not venture into the futures arena but wish to take exposure to the sweet and volatile commodity.

New lows for 2019 for sugar

Active month October sugar futures on the Intercontinental Exchange reached the high for 2019 at 13.96 cents in late February. Since then, the price of sugar has made lower highs and lower lows.

Source: CQG

As the daily chart highlights, the price of sugar futures has continued to decline throughout most of 2019, reaching the most recent low at 10.86 cents per pound on September 5. Open interest, the total number of open long and short positions in the sugar futures market has risen steadily since early July. The metric moved from 838,771 on July 1 to 1,079,648 contracts at the end of last week. The open interest metric had risen to a new record high during the first week of September. Both price momentum and relative strength indicators have declined into oversold territory. Daily historical volatility at 14.02% has declined as the descent of the price of the sweet commodity has been slow and steady.

The sweet commodity heads for the 10 cents level

The price of sugar is heading for 10 cents per pound once again. Last year, the price fell to a low at 9.83 cents in September, which was the first time that sugar futures fell below the 10 cents level in a decade.

Source: CQG

As the monthly chart shows, sugar approached the 10 cents per pound level in 2015 but stopped short at 10.13 cents. Before last year's low, the last time the price was below 10 cents was back in 2008 when it hit a low at 9.44 cents. In 2007, the sugar futures market declined to 8.36 cents.

Sugar is now heading for 10 cents at the same time of the year it did in 2018.

Memories of September 2018

In September 2018, the nearby sugar futures contract on the Intercontinental Exchange worked its way to 9.83 cents during the week of September 24.

Source: CQG

The weekly chart illustrates the decline in 2018 and an abrupt turnaround that caused a rally of 44.9% when the soft commodity reached a peak at 14.24 cents during the week of October 22. The one-month recovery came following the rise in open interest to the previous record level at over 1.058 million contracts. On the weekly chart, sugar has declined into oversold territory when it comes to both price momentum and relative strength metrics. Weekly volatility is below 17%. As the price was falling in 2018, the measure of price variance fell to below 20%. The rally from September through October last year lifted the volatility measure to over 50%.

Last June through September was a bearish time for the sugar market, and in 2019, the same pattern has developed. There are lots of similarities between the price action in the soft commodity this year compared to last.

Three reasons sugar could repeat last year's action

We are now at the time of the year that markets the first anniversary of the decline of sugar to below the 10 cents per pound level. Three factors are making the fall of 2019 look a lot like the same time in 2018. Technically, the price of sugar is in oversold territory on the weekly, quarterly, and many of the long-term charts. The oversold condition could be a sign that speculative shorts in sugar are pushing the price lower.

Another reason that sugar could bounce from around the 10 cents level is that it is at or close to the bottom end of its pricing cycle. Over the past ten years, sugar futures have traded in a range from last year's low at 9.83 cents to a high at 36.08 cents per pound. At under 11 cents, sugar is a lot closer to the lows than the highs with demand expanding each day. Population growth around the world increases the demand for sugar, even though more health-conscious diets have decreased the consumption of the sweet commodity. Each year supplies depend on the weather in critical growing regions. When it comes to sugar, in South America, sugarcane is the primary ingredient in ethanol. Demand for the biofuel is a significant factor when it comes to the price path of sugar. Abundant supplies and inventories over past months and years do not guaranty the future availability of sugarcane. Therefore, the price is always subject to sharp moves during weather events.

Finally, since the world's leading producer and exporter of sugarcane is Brazil, the soft commodity is sensitive to the exchange rate between the Brazilian real and US dollar. Sugar futures use the US currency as a benchmark, and local production costs are in Brazilian currency terms. Therefore, a fall in the real tends to weigh on the price of sugar futures while a rise in the currency is often a supportive factor.

Source: CQG

The monthly chart illustrates that in 2011 when sugar reached over 36 cents per pound, the Brazilian real versus US dollar peaked at over $0.65. Both sugar and the Brazilian currency are at either side of one-third the value as eight years ago with the real trading at $0.24465 on September 9 and sugar futures at just below 11 cents per pound.

Last year from September through October the real rallied from $0.23625 to $0.28035 when sugar recovered from 9.83 cents to 14.24 per pound. The Brazilian currency moved higher as the nation elected a business-friendly government under President Jair Bolsonaro. The recent decline in the real came on the back of fires in the Amazon and economic turmoil in neighboring Argentina. With the real at the bottom end of its trading range, the downside in the currency could be limited with significant upside potential. A recovery in the real would likely cause the price of sugar futures to move higher.

CANE for those who do not trade futures

The most direct route for investment in sugar is via the futures and futures options that trade on the Intercontinental Exchange. The Teucrium Sugar ETF product provides an alternative that tends to outperform the price of sugar during price declines and underperforms during rallies. CANE holds a portfolio of three of the most liquid sugar futures contracts. The nearby futures contract often exhibits the highest degree of price variance when it comes to short-term moves, which creates the underperformance on the upside and a better result on a percentage basis when the price declines. The most recent top holdings of CANE include:

Source: Yahoo Finance

CANE has net assets of $8.75 million and trades an average of 21,879 shares each day. The ETF charges an expense ratio of 1.0%. The last significant rally in the sugar market came in late July when the price rose from 11.39 to 12.30 cents from July 23 through July 30. The price appreciated by 7.99% over the period. The price then fell from the July 30 high to its most recent low at 10.86 cents on September 5, a drop of 11.7%.

Source: Barchart

Over the same periods, the price of CANE rose from $6.62 to $6.99 per share and then fell to a low at $6.33 per share. The rise of 5.59% underperformed the futures on the upside, and the decline of 9.44% outperformed on the downside.

If September through October is going to be anything like 2018 in the sugar futures market, a long position in the sugar market or the CANE ETF could sweeten your portfolio over the coming weeks.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.