Land Down Under Lifts Sugar

Today's Idea

Sugar market fundamentals remain extremely strong. Just when the market seems to find buying pressure subsiding, fresh news breaks and adds to the market's already strong fundamentals. For this reason, some traders may be looking to take on a bullish position in the Sugar market. The volatility of the futures market may be a bit much for many traders to stomach, however, and also, option premiums remain high. For these reasons, one could argue that a credit strategy may be what many traders are looking for. Some traders may look to sell the Feb Sugar 28 puts and buy the Feb 27 puts for a credit of 0.50, or $560. The max profit would be the initial credit and the trade risks an equal amount, $560.

Fundamentals

Sugar futures are up for the third consecutive session on the heels of no rate change in China and expectations of new shortfalls. This time it is the land down under that has contributed to the bullishness in Sugar. Production may drop to 19-year lows in Australia, on heavier than average rainfall. While Australia is not a heavyweight in Sugar exports like Brazil and India, the Aussie shortfall could put much unneeded stress on an already tight world crop. The world is bracing for a shortfall in the marketing year ending at the end of September. Previously, many traders were mildly optimistic that the Indian crop would make a comeback this crop year, but the weather was not cooperative. Brazil, which actually upped its plantings, has also been plagued with bad weather. Sugar growers need a bit of good news for prices to back off, but this seems unlikely at this point.

Technical Notes

Turning to the chart, we see the March Sugar contract breaking-out above the 29.50 level and now trading above 30.00. Technically, the market has been able to pick up some momentum since making relative lows in the 25.00. The March contract may now be setting-up to make a run at the 33.00 level, near contract highs. The RSI is a bit overbought at the moment, which could curtail some of the market's buying pressure.

Rob Kurzatkowski, Senior Commodity Analyst