This week’s comment finds July sugar futures working to stay in the rally-mode we have seen for the last 10 days or so. Trading out above the 50-day moving average, 12.30 and 12.63 respectively, in both the still front month July contract, and the rapidly approaching October contract, the sugar market is making a convincing technical case for continued short covering. The “Fund trader” category, made up of trend following hedge funds and other risk-taking, profit seeking entities, has been building a short position since late April. It did not take long for the Funds to establish a large short position and it didn’t take long for July sugar to turn right back on them and begin the march higher.
Fundamentally, wire services and specifically the Hightower group, are pointing to monsoon season in India and other challenges that could lead to production deficits. Also, they mention, Brazil continues to favor sugar cane for fuel even as energy prices have declined dramatically – this is not bearish. The relative strength sugar futures are displaying in the face of this recent energy weakness is notable. I am suspicious of a rally based on the idea of the possibility of a production deficit next year. It is possible the funds got caught adding aggressively to shorts and that is all there is to it. The markets are designed to sniff out and punish those who are overextended. Another begging question is will there be headlines in the next two weeks relaying recent purchases from large importers or some other fundamental factor that comes into view? This Friday’s COT should show funds have covered a substantial amount of their short position and may even be close to flat. The key to remember is funds don’t stay flat, so even if the fundamentals don’t match the price action yet, it is likely money flow will rule the day. I don’t have enough conviction in the long side to recommend positioning that way but would not be surprised to see the rally continue for a time.
Sugar Jul ’19 Daily Chart