High energy prices support sugar futures
The return to a wetter pattern in Brazil is some thing that the market has been anticipating for weeks. Now that the rains returned, why are sugar futures trading up above 10 cents again? In spite of the good weather returning to Brazil, other market fundamentals are providing support, which seems to be driving sugar higher. Last week saw relatively rangebound trading with the March contract staying within a range between 10 and 10.25, and there were very few opportunities when prices dropped into single digits. The trend was slightly positive, with no real opportunities for breakouts on either side. The March No.11 contract closed Friday’s session at 10.23 and May closed the week at 10.22.
The price chart (Mar08) shows that nearby sugar futures closed at a level not seen in the market since early August, which is when some of the talk about South American dryness started to circulate. If we look back a little further, this recent bull channel does resemble the start of this earlier price run which commenced in July. So while the supply side looks good, some more upside potential is certainly a realistic scenario. Dominating the headlines last week was $90 crude. The question of which crude price we will see first ($70 or $100) is certainly pointing towards the latter, and it may come sooner than expected. As crude soars, so does the demand for oil alternatives, so ethanol demand is expected to remain strong in the short term. Any additional sugarcane that is diverted to ethanol will cut into available sugar, and even though sugar stocks are in a favorable situation, estimates that will remove some of the anticipated sugar supply will have a reaction in the futures market. Adding to this uncertainty in the sugar market is the continuation of the weaker $USD, which will have Brazilian growers holding onto stocks or selling domestically until more favorable exportable currency rates return. Adding to this pressure is the increase in the market’s net long open interest position, which has increased again according to the Commodity Futures Trading Commission. The Weather Trends rainfall forecast continues to verify, but at the moment, this is secondary to other factors in the market.
So where do we go from here? Global stocks are healthy, the estimated surplus is not wavering, and weather in major origins is good for planting and harvesting alike. As the discussion above highlights, oil will likely be the key driver in the sugar market this week. The next technical support level for the March contract will be right around the 10 cent mark; crossing through 9.9 would indicate that lower lows are likely in the short term trading picture. Daily closes above 10.15 would indicate a short term low has been crossed.
