Futures Market: No Economic Slump For Sugar Prices!

Fundamentals

Sugar futures must have their blinders on, ignoring the slumping stock market and surging to nearly 5-month highs. Fundamentals have sweetened for bullish traders, with the International Sugar Organization forecasting a 4.3 million ton deficit for the 2008-09 crop year, up 0.7 million from its previous forecast. The world’s largest consumer of Sugar, India, is expected to become a net-importer of Sugar, as lower production may force the country to export as much as 2 million tons this year. The recent recovery in Oil prices may also be a factor in rising Sugar prices, as higher fuel prices could spur increased cane ethanol production out of Brazil, which would limit the amount of cane available for Sugar production.

Speculators, and especially large traders, have really embraced the long side of the Sugar market according to the most recent Commitment of Traders report. In the report, large non-commercial traders were holding a net long 130,000 contracts as of February 17th, up 6,254 contracts from the previous week. This is not surprising, as many of these traders are “trend followers” and will add to positions as prices move in their direction.

Commercials are on the other side of these positions, holding a net short 146,104 contracts. The biggest fear for Sugar bulls could be the potential for withdrawals from “long only” commodity funds. This would force the liquidation of positions not only in Sugar, but also across the commodity spectrum - especially if the economic slump continues and the need for liquidity increases.

Technicals

Looking at the daily chart for May Sugar, we notice the downward correction earlier this week was put to a halt on Wednesday. This may have been tied to the sharp rally in Crude Oil futures, after the bullish EIA energy stocks report. Prices accelerated to the upside once the previous resistance at 13.64 was broken. Prices are above both the 20 and 100-day moving averages, which is deemed bullish by both long and short-term traders. The 14-day RSI is strong, with a current reading of 66.02. Besides the psychological resistance at 14.00, the next chart resistance is seen at the September 26 highs of 14.92. Minor resistance is found at the 20-day moving average currently at 13.25, and major resistance at the recent lows of 12.91.

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