Softs

Sugar Short Covering Rally Complete. Now what?

Posted 06/14/2018 2:42PM CTJoe Nikruto

This week’s comment finds the now prompt October sugar futures contract occupying technically treacherous middle- ground.  Flagging consolidation gathering for new upside thrust or failing momentum showing a withering attempt to establish an uptrend? As we discussed in previous comments the sugar market has undergone an almost total change in ‘ownership’. Commodity trading funds who were short over 150k contracts a little more than a month ago are now only slightly short and maybe even long.  The commercial trader category has gladly taken the other side selling sugar futures to the fund trader on the way up. This recycling of positions, in my opinion, leaves the market now vulnerable to downside pressure. 12.98 and 13.17 to the upside along with 12.00 and 10.92 to the downside are the levels where funds will have to commit and begin to establish new positions. 

This morning’s comment from the Hightower group continued to highlight the use of sugar cane for ethanol as the margins are supportive. Sugar has been remarkably resilient in the face of news of continuing surplus as well.  Large producers such as Thailand and India continue to flood the market with sugar according to Hightower. Known fundamentals? Maybe so. But the global surplus of available sugar shows no sign of abating.  In times of commodity price inflation sugar futures become almost an asset class in and of themselves. Commodity prices are not on fire by any measure, yet.  And, I would not suggest that this inflation hedge could be enough to propel the October futures market to new highs by itself.  If October sugar futures were able to hold here and begin to advance up toward those levels I mentioned earlier the funds would be forced to establish new long positions. This could see October sugar futures trade up to 14.00. My favored scenario is tied to the fundamental situation, surplus for the next year or two at least, which I believe will bring sugar back down to 11.00. How to choose a direction? This is a spot where traders can be on both sides of this market with option spreads. While we are squarely in the middle of the last 2-3 weeks range I do not expect to see the October sugar futures contract here for long, one way or the other.

Sugar Oct ‘18 Daily Chart

Sugar Oct '18 Daily Chart

Joe Nikruto

Joe Nikruto attended Indiana State University and DePaul University in Chicago with a major concentration in economics. "It was during college that I got a job as a runner at the Chicago Board of Trade. I was immediately hooked," he says.He adds that he also enjoys futures trading because anyone can do it. "Your success depends on how you handle the risk and how much work you are willing to put in. You don't need a big-time Wall Street connection, or a degree from an Ivy League school to get started. Your success largely depends on you and what you put into it." In 1992, he started as a runner and back office clerk for a very large futures commission merchant (FCM). He moved up to pit clerk, then research associate working on the trading floors directly for a grain and livestock concern based in Memphis. He spent time on various trading desks for a large retail FCM and then became Series 3 registered in 1997. He also helped develop an online trading platform and consulted on development and trading of mechanical trading systems. He has always worked to assist his clients with all types of trading-from option strategies and hedging to complicated mechanical trading systems. His advisory background includes Floyd Upperman, McMaster, Walter Bressert, Ken Roberts, Tech Guru, Hightower, Helms and Barry Rosen. As for his involvement with RJO, Nikruto says, "R.J. O'Brien has been in operation for more than 100 years. That is a century of supporting customers. You have to be doing something right for folks who use futures to choose to do business with you for that long."