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March Sugar Retreats from Highs. Funds Positioned Precariously

Posted 11/01/2018 7:34AM CT | Joe Nikruto

This week’s comment finds March sugar retreating from recent new highs. After surmounting the 14.00 level six days ago, sugar has turned south and dropped a full point from those highs which came in at 14.24.  This move lower has coincided with the victory of Brazilian President-Elect, Jair Bolsonaro.  The Brazilian currency had been standing strong in the days leading up to the election providing support to sugar, but as the election has drawn to a close so has higher prices for sugar. Wire services continue to report an anticipated Brazilian production deficit for 2018/2019. This morning widely read market commentator, The Hightower Group, referenced Datagro, a Brazilian analytics firm forecasting 26.38 million tonnes, which could be a 12 year low in Brazilian sugar production. Wire services have also recently pointed to European sugar beet production being much lower as well as a forecast by the Indian Sugar Mill Association forecasting a drop of 11% in Indian sugar production.

 The chart has suffered technical damage. The 10 and 18-day moving averages which had raced up to meet the market in the last week have been left hanging overhead. Today’s close, 13.15, is still almost a full point away from the 50-day moving average, 12.27.  Is sugar headed for that level, the 50- day moving average? The jury is still out, but the recent gyrations in sugar have left the commodity trading funds exposed yet again.  12.61 and 12.54 are levels where newly booked longs will begin to be stopped out.  There is a previous high, 12.56, on the chart which also coincides with the 50% retracement of the rally that started at the beginning of October, 12.52.  That is a lot of numbers in one area and it shouldn’t surprise us if the market chooses to head there to take a look. 

Of interest, in terms of market participants is the recent increase in sugar longs added by the Index fund category, roughly 13k contracts, which is not insignificant. The Index funds hold commodity futures as a hedge against inflation and will re-balance positions from time to time. This increase in their holdings of sugar futures seemed more like protection against inflation as opposed to a garden variety re-balancing. Also interesting in the market participant category is the Commercial trader has sold into this recent rally.  The commercial trader has deep pockets and different motivations than speculators both large and small, but often markets ultimately end up trading in the direction they are positioned.  Bottom line, we are nearing an area that should be instructive. If the market holds above the gang of technical levels we highlighted above that will speak to underlying strength, maybe the market taking the possibility of production deficits seriously. However, I would like to position traders to take advantage of lower prices. Options will allow for reasonable risk-taking in a market that is changing directions as dynamically as March sugar is at this time.

Sugar Mar ’19 Daily Chart

Sugar Mar '19 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."