Sugar has rallied more than 50% since the February lows, primarily based on supply concerns. There are current weather issues in South America and Southeast Asia as well as structural issues that will see the sugar market shift from surplus to deficit this calendar year. The common news reports regarding global El Nino issues combined with speculators increasing need to own something in a 0% yield investment landscape has led to a new large speculator record long position in the #11 sugar futures contract, according to the weekly Commitments of Traders report. We believe the record position is unsustainable.
Coffee futures have been trending lower since October of last year. As always, coffee trends are anything but smooth as seen by the spikes in the included chart. Whether these spikes washed out short positions or simply forced them through some pain is not the point of these spikes. Today’s point is how to use these spikes, like the current one, to initiate new short positions inline with the commercial traders. Hopefully, this avoids being stopped out or having to endure too much pain while still participating in the opportunities that trading coffee futures presents.
We’ve suggested that the recent rally of more than 50% since August 24th in #11 sugar futures is unsustainable, even to the point that we sold the market early in October in anticipation of its failure. As usual, the market told us exactly what we could do with our, “suggestions.” Fortunately, the consolidation between November and December has provided us with another chance to short the market. This time, perhaps even more decisively thanks to increased commercial trader selling as reported by the CFTC in its weekly Commitment of Traders report.
The group of markets known as the, “softs” or, “exotics” include markets like coffee, sugar, orange juice and cocoa. These are all traded on the Intercontinental Exchange and each market marches to its own beat. These markets are known for their volatile moves but rarely get the trading attention they deserve. For some, like orange juice, it’s due to low trading volumes that make it tough to execute any more than a couple of contracts. However, others like coffee, sugar and cocoa have more than enough volume to handle 10 contracts or more in a single execution. Finally, because these markets have little correlation to the majors, their analysis is frequently overlooked. Today, I’ll review one of my favorite trading techniques in these markets and detail the current situation setting up in the cocoa futures market.
The sugar market has been one of the few bright spots in the commodity futures. Since most commodity exposure is long only and this market has rallied between 45%-50% since bottoming in late August it has become a commodity darling. There are three primary reasons for the recent rally. Of these, only one is structural. We feel the transitory nature of the other two will conspire to bring prices back down as the #11 sugar futures tighten their link to domestic prices in the primary growing regions.
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.
The coffee market has always been one of the speculative stars of the futures’ markets. This is due to the large contract size of 37,500 pounds and this market’s typical volatility. Even at the currently depressed prices and low volatility, the average range is still more than $1,300 per contract, per day. This market is famous for its fast, giant swings and the associated sums of money made or lost. Fortunately, the recent decline in coffee’s volatility comes at a time when commercial long hedgers, the coffee roasters, are laying in stores for future production. Their buying serves as a proxy for fundamental data and valuations. While we can’t afford to hold positions the way hedgers do, we can put the leverage of their hedges to work for our own speculative purposes.
The sugar market, like many commodity markets has been grinding lower, now down 40% for 2015. Additional problems have been forced on the sugar market by currency weakness among key producers Brazil and India. This has made it cheaper for them to produce sugar domestically and sell it globally thus, increasing the current supply glut on top of 5 years of production surpluses. In spite of its recent dismal performance, we see commercial trader action indicating that the sugar market internals are gearing up for a rally attempt.
The Frozen Concentrated Orange Juice (FCOJ) futures have been trading sideways for since last winter’s Polar Vortex spooked the market. What we’ve seen since has simply been a range bound, unexciting market to which, I say, “Thank you!” Trading for a living isn’t about excitement. It’s about making an easy living in the toughest way possible. Therefore, when a trade sets up with our methodology in a low volatility environment, I can be reasonably sure that even if I’m wrong, it will be manageable. Today’s orange juice trade combines our Commitment of Traders (COT) Buy signal along with some late winter seasonal analysis from Moore Research.