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Sugar Falls Off a Cliff but Summertime Makes Breakouts Tricky

Posted 07/19/2019 7:31AM CT | Joe Nikruto

This week’s comment finds October sugar under pressure. 12.60 to 11.60 in 6 trading sessions! The October contract had been hugging the 50-day moving average for the last 2-weeks until falling off a 12.25 cliff. Today’s low, 11.53, takes sugar to the lowest level of 2019. Wire services and futures commentators are highlighting recent large deliveries, the last reportedly upwards of 15,000 lots. The resulting price action, in my opinion, shows the inconvenient effect abundant supplies can have on the sugar deficit narrative. Weakening price action in outside markets hasn’t helped. Of note on the fundamental front, a large commodity concern has been getting mention across the wires for a study they recently put out detailing what they see as cost of production in sugar producing countries. At the risk of oversimplifying, the study showed that all producers had cost of production that was higher than the current futures price.

This is the same discussion we have seen in coffee, where the “C” price, the benchmark for Arabica coffee traded on the ICE exchange, is reportedly lower than the cost of production in Brazil and Columbia. Even a two-armed economist has to raise an eyebrow toward a commodity that is trading on the open market for less than it costs to produce. How long can that go on? Technically intermediate-term trend followers have been forced into new short positions over the last 3 trading sessions as price has dropped and open interest has increased.  I expect the COT report this Friday to show the fund trader category has increased their short position. Sugar has challenges. Trade friction between the U.S. and China could result in less sugar imported into China. Big up-front supplies of sugar could be followed by increased production from countries such as India and Brazil. But, the timing of this move lower, the middle of summer, means that even the most bearish of traders must be vigilant and extremely nimble. Do you have profits?  Place a stop. Commodity markets are good at punishing trend followers in the summertime.  Sugar is coming into good support and while the trend is down we could see a nice bounce up to the 18-day moving average, 12.33. Traders with the tolerance for the risk can position for this bounce and then look to be short when the market tests the 18-day.

Sugar Oct ’19 Daily Chart

Sugar Oct '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."