Sugar futures have rallied more than 40% since the August 24th low. Let that sink in for one second. That’s 40% in 37 business days, a solid rally to say the least. This rally has brought the market back to exactly, unchanged on the year yet, well below the $.30 and $.36 per/lb highs of 2011’s rallies. Interestingly, this rally appears to have been fueled by supply fears shifting to short covering. The main growing regions are preparing for the impacts of this year’s El Nino event even though our own El Nino research has shown that historically, El Nino fears spur rallies to be sold in the sugar market. Furthermore, the recent rally has finally forced many long-term short positions to cover in the face of heavy commercial selling as this rally has progressed.
This brings us to the current situation. Commercial sugar traders have dominated this market’s action throughout the year. You can see on the chart below that they’ve successfully called nearly every move, on both sides of the market. Also, notice that we track both the commercial traders’ net position as well as the momentum of their buying and selling. This allowed us to capture multiple short trades this year, even as commercial traders set a new net long record position and then, re-tested it just three months later this past April and July, respectively. Most importantly, for our current purposes, commercial traders turned sellers immediately as the market began to rally, quickly unloading more than 170k contracts in the last six weeks. This major shift in position as speculators cover shorts and exit now leaves the commercial trader group holding nearly 70% of the total open interest in this market. This is their most dominant position since the July 2012 high near $.30 per/lb.
The ICE sugar #11 futures contract is a fantastic market. The margins are low, currently less than $900 initial margin. Volume is exceptional with more than 400,000 contracts in open interest, even after the open interest decline due to exiting short positions. Finally, there is enough volatility to provide ample opportunity as noted above. The intensifying commercial selling upon this rally is finally taking its toll. We believe this market will head back under $.12 per/lb and towards its 200 day moving average near $.115. After all, the last time the commercial traders became this bearish, the market sold off to new lows for the move.
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