A sweet bull market sours.
Lower highs and lower lows since October 2016.
Deficit turns to glut.
Support at 12.45 cents.
Production cuts will create the next bottom.
This idea was discussed in more depth with members of my private investing community,Hecht Commodity Report.
We are all consumers of sugar, but many of us do not think about the price on a daily basis or in most cases, at all. Sugar is a condiment in restaurants, and they offer it to customers free of charge. We consume sugar, which is an ingredient in many if not most of the foods we eat each day. For those of us who enjoy an occasional or constant flow of sweet treats, sugar brings joy to our palates and lives.
Aside from the adverse health effects of too much sugar, the commodity is a staple that most of the 7.4 billion people on earth enjoy often. My grandmother, who lived to be 99 years and seven months, always told me that everything in moderation is acceptable, even sugar. Individual consumers pay little attention to the price of sugar, so the demand side of the fundamental equation is less elastic than the supply side. The international sugar market is a complicated mess because many governments around the world subsidize production leading to a controlled or fictitious price. However, the price of world sugar that trades on the Intercontinental Exchange represents the sweet commodity produced in areas of the world like Brazil, Thailand, and other countries that operate a free market for the staple.
Sugar has been a highly volatile commodity over the years. In the 1970s it traded as high as 66 cents per pound wholesale, and in the mid-1980s the price dropped to 2.29 cents. In August 2015, the price of sugar fell to the lowest level in seven years when it traded at 10.13 cents per pound. A shortage developed as the price made production less economic and farmers turned to other more profitable crops. Less production caused a deficit in the market to grow, and the price proceeded to more than double by October 2016.
A sweet bull market sours
As the weekly chart highlights, #11 sugar futures moved from 10.13 per pound in late August 2015 to over 20.26 cents at the end of June 2016 and eventually peaked at 23.90 in October 2016. Since then it has been all downhill for the sweet commodity as the price action has turned sour.
Lower highs and lower lows since October 2016
The dramatic price appreciation in the sugar market caused producers to return to planting cane and beets around the world. As output increased, the price corrected to the downside, and as the weekly chart shows, the price began to dissolve like a spoonful of sugar in a hot cup of coffee since October 2016. The decline in the price of sugar has been a steep slope, and the sweet commodity has made lower highs and lower lows over the past eight months. The deficit that caused the price to double has turned to a condition of oversupply that has weighed on the price of the ubiquitous staple.
Deficit turns to glut
The price action in the sugar market since August 2015 is a textbook representation of commodity economics at work. When the price declined to the lowest level since 2008, production slowed, demand increased, and inventories began to fall. At over double the price at the lows in 2016, output increased, demand fell, and stockpiles rose. Most recently, a small surplus has developed in the sugar market, and the price has depreciated to its most recent low of 13.63 on June 2.
The daily chart illustrates the bearish price action in the sugar futures market which was trading below the 14 cents per pound level on Tuesday, June 13. After breaking below many areas of technical support since February of this year, sugar is now fast approaching its next level which will be another critical test for the sweet commodity.
Support at 12.45 cents
As the weekly chart shows, the next level of technical support now stands at 12.45 cents per pound, the February 2016 lows. Below there, only 10.80 stands in the way of sugar’s most critical support level, the August 2015 lows at 10.13 cents per pound.
Production cuts will create the next bottom
The path of least resistance for the price of sugar has been lower, and the trajectory of the bearish price action has picked up steam since February. However, the sweet commodity has soured to a price where fundamentals may start looking a lot better in the months ahead.
The International Sugar Organization recent said that, if producers in 2018-19 “manage to keep output at the level projected for 2017-18, the surplus phase may continue for one more season.” Meanwhile, the ISO went on to warn the market against becoming too bearish for the future. The trade organization went on to point out that a massive drawdown in stocks was underway and boosted its projection for a decline in inventories by 800,000 tons to 6.81 million tons. According to the ISO, “Any further easing of world prices in response to expectations of a possible return of the world supply and demand to a modest statistical surplus in 2017-18 may be muted by a low level of stocks” as sugar production heads into the next crop year. The ISO went on to project a decline in global output next season because of the lower price. Their estimates for declines in Brazilian, Chinese, Thai, and U.S. production more than offset an increase from European producers. In France, farmers recently told markets that they had planted more sugar beets this year instead of wheat and other crops.
Falling inventories and a reduction in planting by key global producers like Brazil could quickly shift sugar back into a deficit as stocks are declining alongside the price of the sweet commodity.
The trend in sugar has been lower since October, and over recent weeks the sweet commodity has declined through critical support at 14 cents per pound. However, the International Sugar Organization is now warning the market to curb their bearish enthusiasm when it comes to sugar. Commodity economics appear to be slowly turning once again, and it may not be long before a deficit returns to the market and sugar stages a recovery. The price of sugar has been dissolving, making its most recent low at the beginning of June, but it is now at a price where the future may not be quite so sour.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.