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.
