Sugar Rush Increases Volatility. Can Market Hold Higher Ground?

October 4, 2018 9:47AM CDT

This week’s comment finds the March sugar futures contract back into the 12.00’s after 4 solid days of upside price action. In the last 20 days, sugar has traded from below 11.00, to above 12.00, back down below 11.00, and back up over 12.00.  The March sugar futures contract is acting like my kids when I give them sugary snacks.

Strength in the Brazilian Real and the potential for political change in Brazil, highlighted in today’s Hightower comment, are supportive to sugar. Not to mention, the continuing strength in the energy markets. Sugar market watchers have been issuing forecasts for less sugar production in countries that have been producing sugar hand over fist. At some point, lower prices should disincentivize production, but to this point we have not seen that. I am always mindful of being fully committed to my understanding of the fundamental landscape at major market turning points. I am suspicious of market forecasts for less sugar and cannot think of a fundamental change that will alter the supply/demand balance. So, that makes me extra vigilant of my fundamental bias and mindful of price action, I don’t want to be smarter than the chart.

It is very possible that the major sugar producing countries will produce less sugar this year. It is very possible that a new Brazilian president, as suggested by Hightower, will focus more on the production of ethanol than sugar. The market with a large speculative trader category, short position, and the possibility that the fundamentals are turning, should see profit taking and trimming of short positions causing the market to go higher. However, these fundamentals don’t win the day if supply does not decrease. I still want to be positioned for downside price action in the coming weeks, but fighting the tape here is not going to be profitable. I like put spreads that cover the next 2 months, but don’t want to rush into having them on just yet.

Sugar Mar '19 Daily Chart

Sugar Mar '19 Daily Chart

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