Tag Archives: sugar market

Time to Sweeten on Sugar

The sugar futures market has been in a slow motion slide for nearly two years. This follows the market axiom that nothing beats low price like low prices and the expected surplus this year further adds to those concerns. That being said, the sugar market is trading at prices not seen since July of 2010. Furthermore, the sugar market’s seasonality should coincide with commercial long hedgers taking advantage of these multi-year low prices. Finally, the sugar market’s inherent volatility tends to reward forward thinking traders as this market can quickly leave its participants playing catch up.

Continue reading Time to Sweeten on Sugar

End of the Sugar Decline

The sugar market, currently trading around $.17 per pound has been drifting slowly lower since making its all time high of $.2957 per pound in August of 2011. Last week, the market fell through a key support level at $.1662 and traded down to $.1617 before reversing to close on its highs for the week. This could very well be the catalyst to rising sugar prices over the next few weeks.

The sugar market can be exceptionally volatile. Sugar’s average annual movement over the last five years is about 225% from high to low. This year, we’ve only seen a 20% range between the high and low. We expect volatility to increase with range expansion for the year’s range to show up in new highs. We also expect a near term increase in volatility as the market rejects the recent low and reverses course.

The sugar market’s decline has been quite orderly. This means there’s been low volatility. Low volatility compresses risk levels, which leads to tight stop prices. Tight stop prices allow more people to access the market. Tight stop prices also lead to added leverage. Smart traders view risk as a percentage of equity. Tight stop placement allows traders to add multiple contracts while maintaining their own risk tolerances. This ease of access and tight stop placement leads to ballooning open interest. Open interest recently peaked at just over 450,000 contracts. This is the largest open interest since January of 2008.

Staying with the technical characteristics we can compare the change in open interest to their price levels. Tying these observations to the Commitment of Traders reports then allows us to assign the change in open interest to individual trader categories like small speculators, index funds and commercial traders. This type of analysis shows that there were 95,000 new contracts added between March 1st and today. These contracts were all initiated between $.1684 and $.1778 per pound. Furthermore, the build in the commercial trader positions since mid-March is almost exactly 90,000 contracts.

The final technical piece lies in reading the chart itself. The weekly sugar chart shows last week as a key reversal bar. The textbook definition is a chart bar that makes a new high or low for the extended move indicating continuation of the trend before pulling an abrupt about face and closing beyond the previous bar’s high or low. The rejection of this new price level and quick return to previously traded prices indicates a market that has moved too far, too fast. The details of the setup show the weekly range for the week ending June 7th as $.1666 high to $.1632 low. Last week’s reversal bar traded down to $.1617, below the previous week’s low before closing at $.1678, above the previous week’s high.

Finally, we are just beginning the strongest seasonal tendency for October sugar. The seasonal strength lies between the middle of June and the end of July. We feel that the build in commercial long positions, coupled with the large increase in the speculative short position near their current breakeven levels will ultimately resolve its imbalance to the high side.

Last week’s key reversal bar leaves 90,000 contracts in jeopardy of being stuck holding the hot potato. Given the low volatility the market has been experiencing I believe that many of those new positions have pretty tight protective stop loss orders tied to them. Therefore, as this market turns higher it should begin to trigger these stops. The buying pressure triggered by the stop loss orders could very well kick off the seasonal strength. The first trend line resistance is just shy of $.18 per pound with further technical resistance around $.20 per pound. Meanwhile, since we are in fact bottom picking, a protective stop loss order should be placed no lower than $.1683.  The primary key to profiting from this trade will be the ability to gauge the buying pressure that comes from small speculators being forced out of their short positions.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Short Covering Spike in the Sugar Market

The sugar market is currently displaying a number of characteristics that truly define what trading in the futures markets is all about both long and short-term as well as trend and countertrend strategies. Looking at the sugar futures market from a long-term trading perspective it is easy to see that short traders have been in control of the market since the last upward spike in prices last July. The sugar futures have steadily declined under the growing certainty of a large Brazilian harvest as well as declining demand in a slow global growth economy. These factors have combined to push sugar to its lowest traded prices since December of 2010.

All the telltale signs of a solid trend have accompanied the sell off in sugar. For example, open interest has skyrocketed from approximately 70k to more than 350k since the July 2012 high. There are two reasons that open interest swells as the market moves directionally. First of all, the market allows the people who are early to put on the correct position to stay in that position. I know this sounds simplistic but traders with profitable positions can rest easy and let the market do its own work. Secondly, the increase in open interest is attributable to more people climbing on the trend. Other than a minor spike last October, most anyone who has initiated a short position in the sugar futures market has been rewarded with profits quite readily. These two factors work hand in hand inviting more people to board the gravy train of easy trend riding profits.

The downward trend in sugar futures is well founded due to the expectations of a huge 2013 harvest that should be led by a record Brazilian harvest. This is news that everyone is aware of and this fundamental information has attracted good traders to the sell side of the market. Technical traders have also had an easy go of it since what rallies there have been have been capped nicely by the 90 day moving average. In fact, the last time the 30-day moving average crossed under the 90-day moving average was in August of last year. Finally, technical traders on the short side have collected profits due to the orderly decline of the market thus far rather than getting stopped out on any spikes in volatility.

This brings us to the current situation and our reasoning for looking for a buy signal in a downward trending market. First of all, the ballooning open interest happens to occur as the market has begun to stall. The market has traded between 16.69 and 19.25 since February 1st. This is a pretty tight range considering open interest has more than doubled since then. This means that there are more than 150k new short positions in the market over the last six weeks. Furthermore, none of these new short positions have had the chance to accrue much in the way of profits.

Technically speaking, these new short positions should be sweating. The sugar futures made a new low for the move last week, trading down to 17.56 and followed it up with a new low this week down to 17.55. Last week’s trading range was merely 22 points. The last time the market traded that tightly for an entire week was in September of 2010. Furthermore, this week’s new low, by one tick, has now been followed by a breach of last week’s high at 17.78. This creates an outside bar on a weekly basis. This is typically a good reversal signal for the next couple of weeks.

The new short positions will have protective stops placed relatively close to the market since risk should always be the number one consideration when determining a trade’s appropriateness. This week’s action clearly showed that the market has run out of people willing to create new short positions under 17.55. Markets always run to where the action is. The declining ranges combined with this week’s reversal bar lead me to believe that the next move is higher.

I expect the market to make some type of bottom here. However, it is always important not to sell a rocket or, buy a falling knife. We will enter the market through the use of a buy stop order. This means we will only buy the market if it can climb high enough to trigger our entry stop, which will be placed at 17.85. We expect this to begin triggering buy orders all the way up as traders take their profits or losses, accordingly. I expect the market could trade as high as the 90-day moving average at 18.74. More likely, it will stall out between the trend line dating back to July that now comes in at 18.47 and the 90-day moving average, now at 18.74. If our buy stops are filled, we will place a protective sell stop at 17.59, which should limit risk to just under $300 per contract.

Rarely do we find a contrarian play so clearly set up and with such a high risk to reward ratio. If we are right, the market will get us in on the long side just as 150k contracts are washed out on the short side thus creating a technical bottom in line with the seasonal tendency of the New York July sugar futures #11 contract.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Shifting Sentiment in the Sugar Market

 

We’ve spoken repeatedly about the value of food commodities
throughout this year. However, the sugar market supply will most likely outpace
demand this year. The sugar market is quickly replenished with multiple
harvests per year. The quick growth cycle combined with more normal weather
patterns in the primary producing regions should see this year’s crop make up
for the last two years of deficit production.

The sugar market was 2010’s most volatile market on a
percentage basis. Using the stock market and gold as a comparison, gold would
have had to reach $3,300 per ounce to match sugar’s rally for the year and the
Dow Jones Industrial Average would have had to fall to 4172 to match sugar’s
decline. Given this type of volatility it’s easy to see why we look to the
commercial traders’ actions to establish a sense of value in the markets. These
are the traders who focus solely on their market and build their business plans
around their ability produce sugar or, turn it into a finished product.

Commercial sugar traders have been exceptionally good at picking
out the major turns in this market and thanks to the Commitment of TradersReports, their actions are easy to trace. Commercial traders were active buyers
as the market traded down to $.20 cents per pound in early May. Since then, the
market has rallied more than 50% to over $.30 cents per pound. Remember, we
said sugar is a volatile market. This move higher has been fueled by two
factors. First of all, the refining margins on raw sugar have been
exceptionally high. This brought in quite a bit of recent demand but will
subside as the spread between raw and refined sugar narrows due to increased
production. Secondly, there has been significant speculative money put to work
on the long side of the market with investment coming from small traders, funds
and managed money.

The rally in sugar may be running its course as the spread
between raw and refined sugar tightens and the commercial traders see this
market as more and more overvalued. Through analysis of the weekly COT reports,
we can see that ownership of long positions is shifting from commercial, value
based buying and into the hands of speculative buyers. Last week commercial
traders sold more than 14,000 contracts, which were almost directly bought by
managed money and swap dealers.

The shift to a speculative stance in this market could leave
it vulnerable to a sell off if the fundamentals hold steady. Production in
Brazil, Thailand, Russia, France and India all appear to be near all time
highs. Much of this is due to extra planting based on the high prices received
last year. A rising tide may float all ships but an overloaded one will still
be the first to sink.

 

This blog is published by Andy
Waldock. Andy Waldock is a trader, analyst, broker and asset manager.
Therefore, Andy Waldock may have positions for himself, his family, or, his
clients in any market discussed. The blog is meant for educational purposes and
to develop a dialogue among those with an interest in the commodity markets.
The commodity markets employ a high degree of leverage and may not be suitable
for all investors. There is substantial risk of loss in investing in futures.

Sugar Tops 2010 Commodity Market Volatility

It’s been a banner year for commodity markets as many of them have witnessed unparalleled growth. The one sided movement in many markets in 2010 has made commodity funds quite favorable as they are only able to invest through the purchase and ownership of their respective niche markets. However, long only commodity funds and Exchange Traded Funds miss out on one of the biggest advantages of trading commodities. That is, the ability to sell a market short and profit from an anticipated decline in prices.

Commodity contracts have set expiration dates. This makes them a very good short- term trading tool because speculators have to even up their positions prior to the contract’s expiration and we can track their actions through the commitment of traders reports. Only producers who intend to deliver their product and end line users of commodities stay in the markets until expiration. Some markets like  crude oil, trade all twelve calendar months. Other markets are delivered quarterly like foreign currencies and stock indexes. The sugar market also has four delivery dates per year. However, they’re not evenly spread out with the contract for March delivery becoming the actively traded contract in October.

The combination of being able to profit in a declining market as well as the uncertainty caused by sugar’s unique expiration cycle as well its relatively recent but substantial use in ethanol has made the sugar market, yes, the sugar market the single most volatile commodity market of 2010. In the commodity markets, volatility equals opportunity. In order to make money in any market, there has to be price movement. The fact that the commodity markets can be traded from both sides provides twice the opportunity. No market has illustrated that opportunity like the sugar market in 2010.

Sugar had rallied throughout 2009 on expectations of a small Indian crop due to a late and insufficient monsoon season hampering their output while Brazil’s was constrained by just the opposite problem. They had too much rain. Brazil’s overabundance of precipitation was hindering their harvest and slashing their yields. Brazil and India are the world’s top sugar producers respectively accounting for more than half of global production. These production concerns came with the pressures of growing a Chinese demand that has nearly doubled in the last ten years and outstripped its own domestic supply in 10 of the last 12 years.

Due to these pressures, 2010 saw the sugar market begin the year at levels not seen since the 1970’s. It’s important to note that sugar is basically a weed, like wheat. Its recuperative powers are stunning, given the right conditions. Therefore, the sugar market that found itself with tight supplies and a dwindling new crop came to experience some decent weather and a stunning recovery. In fact, the Brazilian crop that makes up nearly half of the world’s market and was perceived to be in such dire straits had actually recovered most of its anticipated yield.

The rapid recovery of the crop along with added acreage planted for the coming year quickly caused prices to plunge. The long only global commodity funds were forced to liquidate their positions on the way down. Their disclosure documents require them to maintain proper portfolio allocations, which causes them to buy more on the way up and sell on the way down. Their liquidation further depressed prices and the decline became a race to the bottom. Unlike long only funds, individual commodity traders as well as commodity trading advisors had the flexibility to participate and profit from the market’s decline. The price of sugar lost more than 60% between February and April of this year. This decline was fueled further by a Brazilian report that expected production to be 10% greater than the previous year.

The month of April saw the sugar market consolidate tightly in anticipation of the World Agriculture Supply and Demand Report. These reports are published monthly but the April report is an important one for the sugar market because it is the best reference of planted sugar for the coming crop year. The surprise in this report was a global uptick in demand to the tune of 5.3%. Considering the acreage came in as expected, the uptick in demand more than offset the added acres planted due to 09’s average sugar price. This was enough to reverse the course of the market.

Following May’s World Agriculture’s Supply and Demand Report, India stated that it was going to tax sugar exports to shore up its domestic supplies. Furthermore, the U.S. Dollar’s decline led to increased sugar purchases on the open market as foreign countries could now make purchases on the open market to satisfy the demand generated by their growing middle classes at a discount.

The effect of the falling dollar, a growing overseas middle class and tight global supplies have taken the sugar market from its final low of 11 ½ cents per pound up to a current price of over 33 cents per pound. All told, the sugar market started the year at generational highs around 28 cents per pound. The market then plummeted to a low of 11 ½ and has currently rallied to prices not seen in 30 years. As a comparison, gold would have to trade to $3,300 per ounce to match sugar’s high or the Dow Jones Industrial Average would have had to fall to 4172 to match the sugar market’s February to April decline. Trading of any type requires price fluctuation to make or, lose money. The ability to trade both sides of the market increases the number of opportunities. Volatility is the measure of price fluctuation and the sugar market is its poster child.