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Markets to Watch
Look for opportunities in sugar
While many commodity markets have come under significant downside selling pressure in recent weeks, the sugar market remains in a well defined uptrend, with nearby futures hitting the highest level since April of 2006 on the last day of June. A smaller than expected crop from China and the slow start to the India monsoons has turned a mildly supportive world supply/demand outlook into a potentially bullish setup for the 2009/10 season. A hefty speculative net long position leaves the market vulnerable to weakness and long liquidation pressure from bearish outside markets from time to time, but breaks led by outside markets look like buying opportunities, as ANY weakness is likely to be followed by more aggressive pricing from India for an expanding import campaign for the coming year.
Given the tightness in India and some crop concerns in China, it should not take much in the way of positive news to see a resumption of the uptrend in sugar. News of a smaller crop in China and fears of a continued slow monsoon in India are the key supply fundamentals which are turning more positive. China’s production for the 2008/09 season is thought to be near 12.43 million tonnes, down 16% from last year. Freezes and flooding helped to reduce the crop size. Certainly the large crop in Brazil and the weakness in the energy sector are negative short term forces, but the outlook for more aggressive imports from India this season has helped to provide underlying support. India’s monsoons finally covered the entire country, but rainfall was 46% below normal for the week ending July 1st and government officials believe the monsoon will be near 93% of normal this year, below normal for the first time in four years. In early July, an Indian official indicated that the country is considering allowing private traders to import tax-free white sugar and also is considering extending permission for mills to import at zero duty beyond July. Traders now believe that India’s crop will be 16-18 million tonnes as compared with earlier estimates near 20 million tonnes and India consumption thought to be near 23 million tonnes. If the monsoon activity remains weak, these production estimates could slip further. India was already expected to import 2.5 million tonnes for the coming season, but if crop ideas are correct, imports could reach 4.5-6.5 million tonnes.
The market fell back after reaching its June 30th highs, with the cash market absorbing more than 1.3 million tonnes of sugar delivered against the expired July contract. This amounted to 26,783 contracts. Brazil is in the process of harvesting a bumper cane crop, and many traders are looking for about a 10% increase in the cane crop this year to a new record high. Raw sugar exports from Brazil in June came in at 1.663 million tonnes, up from 1.572 million in May and 1.309 million last June. Ethanol exports in June reached 420,400 liters from 309,000 in May and 424,100 liters last year. Russian imports in May came in at 348,800 tonnes as compared with just 24,300 tonnes in April. The import tariff was adjusted from $220 to $165 per tonnes beginning May 1st. Imports for the first 5 months of the year reached 464,300 tonnes vs. 339,300 tonnes last year.
Technically, the market is in an overbought condition based on traditional technical indicators, but these indicators as well as open interest were correcting on the break last week. The Commitment of Traders reports showed that speculators were aggressive buyers of more than 22,000 contracts for the week ending June 30th, reaching a net long position of 229,482 contracts. Trend-following funds increased their net long position by more than 20,000 contracts, and index funds were net buyers of 3,927 contracts to a net long of 206,660. The buying trend of the funds is positive and the market is a bit overbought, but this buying helped explain the surge higher to the June 30th peak.
If you’d like to receive daily information on the sugar market, click here.
Suggested Trading Strategies:
- Buy October sugar at 16.57 with an objective of 18.66. Risk to 16.10.
- Buy October sugar 17.50/19.25 bull call spread at 49 points and also sell the October sugar 15.75 put at 59 points. Risk a total of 37 points on the entire position and hold for a run to at least 19.03 basis October futures.
If you’d like to further discuss these strategies to determine the best execution strategy for you, contact us.
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Industry News
Government Proposes Regulation to Lower Prices
Apparently Congress, the members of the press and other “important people” have decided that a host of commodity prices need “reform,” despite investigations that revealed no instances of market manipulation. It seems that they think the markets are wrong in the pricing of crude oil, just as they thought the ultra high price of wheat in early 2008 was wrong. This is similar to the tunnel vision that health care reformers seem to be exhibiting. They won’t acknowledge that the US offers some of the best medical service in the world. Their only concern appears to be the cost and availability for people who can’t afford coverage.
With the Congress and new administration’s focus turning toward commodities, one should not think for a moment that the goal is to end market manipulation. The goal is affordability and lower prices. In the wheat market run-up of 2008, special interest groups claimed that high prices were not a reflection of market fundamentals. But you know what? Eventually those “irrational” prices brought an explosion in global wheat production, and prices came back down. An important signal was sent when prices ran up. It said, “Produce more!”
Apparently seeing $140 per barrel oil in 2008, a subsequent decline back to $32 and now a rally back to $73 suggests to some that the energy market is malfunctioning. Clearly oil markets are volatile, but other forces beside “speculation” are at work. In 2007 China and India’s demand was growing at unprecedented levels, and last year China was building stocks ahead of hosting the Olympics. Oil production was running above consumption in 2008 but it fell short of consumption in 2007 and is expected to do so again in 2009 (EIA estimates). China and India are still seeing strong long-term growth potential. Furthermore, a large number of governments and or quasi government agencies are building massive strategic reserves. So even if the oil is not being consumed, it is being set aside, and that is keeping it off the market.
As in the 2008 wheat market analysis, the market reformers think that a few bearish physical supply side fundamentals should have prevented oil prices from rebounding. (Despite the “hope” and “wishes” that green energy will save the planet, the implementation of green fuels won’t make a dent in meeting the world’s fuel demand for some time to come.) Don’t forget that part of the solution to tight oil supplies was to be the implementation of more costly fuel sources like Canadian tar sands and deep sea natural gas wells. But if the goal of energy market regulation is to lower oil prices, it could mean even more dramatic shortages in the future as it would deter investment in those alternative sources.
In the grain markets, a number of special interest groups have pushed for an eradication of speculation. The immediate result of more restrictive action (or the perception that changes are coming) could be the liquidation of long positions and sharply lower prices. But then the incentive to aggressively expand production will be lost. For the better part of 50 years the profitability of an acre of corn was locked between $50 and $200 per acre, and only since corn prices moved to higher levels has the production of corn expanded rapidly. In addition to higher acres of corn in the US and higher acres of soybeans in South America, more money has been plowed into seed technology and farming practices, and that in turn has boosted production. However, if it is decided that corn prices are too expensive and governments try to force prices down through regulation, the result could be a rapid deceleration of output and massive shortages.
In the near term, it seems to be politically correct to claim that the rules of markets don’t apply, and with the proposed regulation coming at a time when corn prices are sitting at or just below the cost of production in some cases, it would seem like the US government is about to work its way into subsidizing US grain production on an even larger scale. In recent years US grain production has continued to expand at a record pace, and yet physical ending stocks of grains can’t seem to rebuild. Index funds aren’t making those bushels disappear. We want those in favor of aggressive regulation of the futures industry to show us where one single index fund has physically consumed a bushel of corn. Ultimately, ending stocks are destined to be whittled down to tight levels regardless of whether the funds are long or short.
Keep a pulse on the industry and access more industry news.
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| In This Issue |
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| Trading Tip |
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Trade with the trends, rather than trying to pick tops and bottoms.
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| Did You Know... |
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A study published by the Chicago Mercantile Exchange revealed that “portfolios with as much as 20% of assets in managed futures yielded up to 50% more than a portfolio of stocks and bonds alone.”
Learn more about managed futures
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FREE “Futures for Stock Traders” Guide
Designed exclusively for stock traders who want to learn about trading futures, this comprehensive guide will help you unravel the mysteries around commodity trading.
Specifically, your informative guide will include:
- A detailed breakdown of futures trading
- The advantages of futures over stocks
- An in-depth look at futures versus ETFs
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About Daniels Trading
Daniels Trading is a relationship-focused commodity futures brokerage located in the heart of Chicago’s financial district. Founded in 1995, we have a history of providing effective and reliable trade executions to both individual traders and institutional investors around the globe. In addition to our focus on relationship and execution, Daniels Trading is a leader in providing ongoing education opportunities and resources for our customers.
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