This year might have been bitter for so many people in so many aspects. But for long-only investors in sugar, 2020 has been unlike any experienced in a decade-and-half. Simply put, it’s been a startlingly sweet year for sugar bulls.
US raw sugar futures on the Intercontinental Exchange are headed for a seventh straight month of gains from tighter supplies caused by COVID-19-induced logistical and harvest problems—although output has started creeping lately in producing countries Brazil and India.
This month’s 25% run-up in crude oil prices has also underpinned the sugar rally. Higher oil prices help sugar because one of the crop’s most important commercial by-products is ethanol—the biofuel that’s blended with gasoline, or petroleum. Ethanol is mandated as an auto fuels additive in top cane growing countries Brazil and the United States.
The last time raw sugar had a longer winning streak was when it rallied for nine consecutive months from May 2005 through January 2006.
The current rally comes after a 13-year low of 9.05 cents per lb posted by raw sugar in late April, just before the full impact of the COVID-19 pandemic impacted planting and harvesting in cane fields from Brazil to India and Thailand.
With the seven-month rally, raw sugar’s front-month contract for March now stands at 14.8 cents per lb, up almost 65% from the April bottom and about 10% higher on the year.
Headwinds Soon For Sugar Longs
Despite the stellar recovery, investors remaining long on sugar might be running into some headwinds from higher supply availability at key sourcing areas, according to Jack Scoville, analyst at the Price Futures Group in Chicago.
In a blog issued on Wednesday, Scoville wrote:
“It has been dry in south central Brazil and the production of cane has been positively affected. Brazil mills have also been producing more sugar and less ethanol due to depressed world and domestic petroleum prices earlier in the year.”
The US Department of Agriculture said recently the surge in sugar production in Brazil was expected to drive a global uptick in sugar supply. The USDA forecast that global production for the 2020/21 marketing year will rise 16 million metric tons to reach 182 million tons, with Brazil accounting for roughly 75% of that growth.
Some 48% of the Brazilian sugarcane crop is expected to be used for sugar while the remaining 52% is going to ethanol, a much closer split than last year’s 65%-35% split in favor of ethanol, the USDA said.
India, the second sugar grower after Brazil, was also due to have a large crop this year, said Scoville. He added:
“The Indian government has not announced the subsidy for exporters of Sugar so no exports are coming out of India yet. Sources told wire services that any subsidy will need to be significant to get export sales on the books.”
Toppy chart patterns for sugar futures on the Intercontinental Exchange might be another reason to start closing out long positions.
Investing.com’s Daily Technical Outlook for March raw sugar has turned from “Buy” to “Sell”, with a three-tier Fibonnaci support from 14.93 cents a lb, to 14.82 and through 14.72.
However, should the contract challenge the projection and stay bullish, then a three-tier Fibonnaci resistance is likely to commence, from 15.11 cents a lb, to 15.16 and through 15.24.
As with all projections, we urge you to follow the calls but temper them with fundamentals—and moderation—whenever possible.
Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. He does not own or hold a position in the commodities or securities he writes about.