SUGAR FUTURES -WEEKLY CONTINUATION
Chart Provided by APEX
It’s my opinion that this is likely a bull flag formation and that sugar, at some point in the near future, will stage another leg upward. A close significantly above 24 cents, on the weekly chart, will target sugar prices to 35 cents and possibly higher. Sugar prices staged a huge rally in the mid 1970’s and peaked at 66 cents and then surged again in the early 1980’s, peaking at 45 cents.
The seasonal tendencies indicate that sugar prices normally rally in November. In many years the market is caught short of supply with the European crop not on line yet, while demand remains relatively constant. The demand for sugar can be described as very price inelastic. This typically describes a market in which a change in supply causes a relatively larger change in price. Another way to describe an inelastic market is one in which it takes a very sharp upward move in prices to ration tight supplies. Basically, sugar demand will not change much if prices move from; say 14 cents/lb to 20 cents/lb. It typically takes a much more dramatic change in prices to curb sugar demand and ration tight supplies. The current sugar stocks to use ratios are considered very low, confirming tight supplies on the world market. Given the demand price inelastic nature of the sugar market in tandem with the fact that world stocks to usage ratios are very low, the potential for a major rally in sugar prices is a very real possibility.
Brazil is one of the large consumers of sugar. Not only do they utilize sugar for food consumption, but they also use sugar in ethanol production. Most cars in Brazil are powered by ethanol. They made the switch from gasoline to ethanol years ago, which was in response to the energy crisis in the 1970’s. It took years to convert the nation over to ethanol. This represents the first real tight situation in sugar since they began burning ethanol. Recent price gains have “just started” the rationing process, with reports of curbed ethanol production in Brazil due to tight sugar supplies. Basically, it required sugar prices to double before this process was started. Other countries which consume large amounts of sugar include India, Pakistan, Bangladesh, Indonesia, the U.S. and Mexico. All of these countries are expected to be buyers on the world market and prices paid will not have a major impact on the amount purchased and consumed, unless prices move sharply higher. Finally, swap dealers are thought to have a very large gross short position. This could mean that commercial selling in futures will be lighter than normal, allowing prices to work higher.
So how does a small investor trade the market without taking a substantial loss in the event that sugar prices move down instead of up? I recommend a long term, conservative approach that will profit in the event that sugar prices stage another leg upward. The approach should also provide for adequate time for such a move to develop. Finally, the position should not expose one to excessive risk in the event that sugar is forging a top.
Specifically, my recommended approach is establishing bull call spreads. More specifically, consider the July sugar 28 cent/32 cent call spread. July sugar options expire June 15th, providing plenty of time for the market to rally sharply. I recommend establishing this call spread at 50 points or less, which represents a $560 per spread premium outlay before commissions. This represents your total risk. If sugar prices rally substantially after establishing the spread (say above 28 cents) you can unwind the position at a profit. Or, if sugar prices are trading above 32 cents on expiration, you will obtain the maximum profit of $4,480 per spread. Risking a maximum of $560 to possibly make $4,480 in 222 days is the type of opportunity available in commodities.
If you’re interested in opening an account to establish a bull call spread in sugar give me a call or send me an email at dennis.smith@archerfinancials.com or 1.877.377.7905.
Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The views and opinions expressed in this letter are those of the author and do not reflect the views of ADM Investor Services, Inc. or its staff. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright © ADM Investor Services, Inc.
