This week’s comment finds the March sugar contract holding up well in comparison to crude oil and gasoline. While these markets and sugar can often be correlated the recent decline in sugar pales in comparison to what has happened in those closely watched “outside” markets. Wire service stories continue to highlight what many anticipate will be a year of declining production. Pestilence, weather, and use of cane for fuel will all conspire to leave sugar with a deficit rather than the surplus we have seen for years according to these sources and sugar watchers have heard this song before. As reports of better than expected production begin to roll in the market responds. I believe the recent fall from the highs is anticipating this story playing out again in March sugar.
Recent technical action has the commercial trader category selling into fund buying. This trend should be reversed as the funds are forced to capitulate and head to the sidelines. 12.08 looms large as an area where funds will begin to enter positions on the short side. 60 points away seems like a short distance for the market to travel to push the funds into these new positions.
With the market jumping back and forth over the 50-day moving average, 12.68, it will be instructive to see if the March contract can hold here or continue to erode. Price action from November 21 brought the market below 12.68 and the March contract even posted a close of 12.46. This puts pressure on underwater longs. While we know moving averages and other lines are merely derived the psychological pressure associated with losing positions around these lines is real. Bottom line, no pun intended, is that if we hold here the production deficit story is still in play and sugar could recover back into the 13’s. This is not what I consider the likely scenario. More likely the market is anticipating at least adequate production and maybe even ethanol margins in Brazil breaking down as mentioned in this morning’s Hightower commentary. While guessing at fundamentals can be imprecise at best the technical action will point the way in coming days. If the March contract doesn’t hold above 12.60’s, lower prices could be right around the corner.
Sugar Mar ’19 Daily Chart