Wednesday, January 4, 2012

Given the bearish fundamentals facing the Sugar market in 2012, some traders may perhaps wish to take advantage of the recent rally to explore bearish trading strategies using Sugar futures options, such as a bear put debit spread. For example, with March Sugar trading at 24.34 as of this writing, the March 24.00 puts could be bought and the March 23 puts sold for a net debit of 0.38, or $425.60 per spread, not including commissions. The total investment in the spread would be the maximum potential risk on the trade and a potential profit of $1,120.00 minus the premium paid, which would be realized at option expiration in February should March Sugar be trading below 23.00.

Fundamentals

After a month-long consolidation period, Sugar futures moved sharply higher to start 2012, tied mostly to a resurgence in Oil futures and a pull back in the U.S. Dollar. Though the rally has moved prices toward 4-week highs, Sugar’s fundamentals may short-circuit further gains. The spike in Sugar prices comes despite forecasts calling for a large Sugar surplus this season, with both India and Thailand expected to be active in the export market. India’s Sugar output for the 4th quarter of 2011 rose by 17% from year ago levels, and the country’s Sugar production is expected to total 26 million tons this season, which is up 1.7 million tons from last year. Commodity index funds are expected to be buyers in Sugar futures to start the year due to index rebalancing, and some traders may be buying Sugar futures in anticipation of index fund buying in the coming sessions. Many large speculators have been shedding their net-long positions in Sugar for some time, with the most recent Commitment of Traders report showing non-commercial traders net-long only 51,922 Sugar contracts as of December 27th. This was down over 3,000 contracts from the previous week’s total and well below the record 216,497 contracts seen back in the spring of 2008. Given the potentially huge Sugar surplus this season, it may be difficult for many speculators to turn decidedly bullish on Sugar futures, despite the strong start this year. It would not be much of a surprise to see fresh selling emerge should the rally persist, as long as major resistance at the 200-day moving average continues to hold.

Technical Notes

Looking at the daily chart for March Sugar, we notice Tuesday’s price surge broke above the upper range of the recent price consolidation pattern on sharply higher trading volume. Prices are now well above the 20-day moving average, but still need to break above the 200-day moving average to turn the technical momentum back to the bulls. The down-trendline drawn from the August 24th high also comes into play near the 200-day MA, currently near the 25.24 level, which should further enhance the importance of this resistance area. Support is seen at the December 15th low of 22.62.

Mike Zarembski, Senior Commodity Analyst

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