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