Sugar falls to the bottom end of its recent trading range.
A test of 10 cents could be in the cards – open interest is too high.
A repeat of 2018 could be on the horizon.
Sugar needs help from the Brazilian currency.
CANE is the sugar ETF product.
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On August 26, the price of sugar futures that trade on the Intercontinental Exchange was trading not far above the bottom end of its trading range. The price of sugar futures had not traded below the 10 cents per pound level since 2008 until last August and September when the sweet commodity probed under the level for the first time in a decade. In August 2018 the price fell to a low at 9.91 and bounced, but in September of last year, the price made a lower low at 9.83 cents per pound.
September 2019 is the first anniversary of the most recent low, and the price of sugar has not traded below 11 cents since then.
The price of sugar has been closing in on the lows under the weight of ample supplies and declines in the currency of the nation that is the world’s leading producer and exporter of the sweet commodity. Sugar can be one of the most volatile agricultural commodities that trade on any futures exchange. Since 1971, the price has traded to lows at 2.29 cents and highs of 66 cents per pound. Over the past decade, the price range has narrowed dramatically to 9.83 cents, last year’s low, and 36.08 cents, the 2011 high. When sugar was on its high in 2011, the Brazilian real was trading at around $0.65 against the US dollar, and other the low, the currency pair was under the $0.24 level. In many ways, sugar acts as a proxy for the Brazilian currency. Both the soft commodity and the Brazilian real could be due for a bounce from the current levels, which could prove as explosive as the price action we witnessed from September through October 2019. The most direct route for a risk position in the sugar market is via the futures and futures options that trade on the Intercontinental Exchange. The Teucrium Sugar ETF product (CANE) replicates the price action in three of the most active sugar futures contracts. The ETF tends to outperform sugar when the price is falling and underperform on rallies, making it a conservative instrument for speculation in one of the world’s most volatile agricultural commodities.
Sugar falls to the bottom end of its recent trading range
The daily chart of October sugar futures on the Intercontinental Exchange highlights the bearish price action in the sweet commodity. Nearby sugar futures fell to the most recent low at 11.09 cents per pound on August 28. Price momentum and relative strength metrics are in oversold territory as sugar is trading at its lowest level in 2019. Open interest, the total number of open long and short positions in the sugar futures market, rose to a record high at 1,075,205 contracts as of August 27. Rising open interest and falling price is typically a technical validation of the bearish trend in a futures market.
A test of 10 cents could be in the cards – open interest is too high
The trend in sugar could take the price for another test of the 10 cents per pound level over the coming days and weeks. The last time we saw the price of the sweet commodity below a dime a pound was in September 2018.
The weekly chart shows that the path of least resistance of the price of the soft commodity remains lower. However, the open interest metric has not been this high since August 2018 when it rose to 1,058,041 contracts. It is possible that the market is becoming overpopulated with speculative shorts looking for a repeat performance of last year at this time.
A repeat of 2018 could be on the horizon
In August 2018 sugar traded below the 10 cents per pound level for the first time since 2008. Last September it made a marginal new low at 9.83 cents which became a bottom for the price of the sweetest commodity on the earth. However, sugar exploded from September 2018 low.
The weekly chart illustrates that sugar turned higher from the September 2018 bottom at 9.83 cents and rallied to a high at 14.24 cents in only one month. The recovery of 44.9% in a short period was a reminder of the volatility in the sugar market. The high level of open interest, an oversold condition in the sugar futures market, and a move in the currency market caused sugar’s ascent from the September 2018 low to the October 2018 peak.
The first level of technical support in the world sugar futures market stands at the 9.83 level, last year’s low. We may see a marginally lower low in the sugar futures market over the coming weeks. However, with a bit of help from the currency market, a repeat of last year’s rally could be on the horizon for sugar.
Sugar needs help from the Brazilian currency
Brazil is the world’s leading producer and exporter of sugarcane. While sugar futures use the US dollar as the global pricing mechanism for the soft commodity, local costs are a function of local currency values. Therefore, the currency relationship between the US dollar and the Brazilian real has a significant influence on the price of sugar futures.
The weekly chart of the Brazilian real versus US dollar shows that the Brazilian currency fell to a low at $0.23625 last August and rose to a high at $0.28035 in late October. The weak real helped push sugar to the lows below 10 cents per pound last September and the recovery in the currency was a factor in the rally to over 14 cents per pound in October 2018.
The chart shows that the Brazilian real has declined over the past six consecutive weeks. Contagion from an economic and political crisis in Argentina weighed on all emerging market asset prices, and Brazil has been no exception. Moreover, raging fires in the Amazon have put pressure on the Brazilian economy and the new Bolsonaro administration. At just over the $0.24 level against the US dollar on August 28, the Brazilian real is close to last year’s low. The fall in the currency has weighed on the price of sugar over the past weeks. A repeat performance of last year’s rally in the real over the coming weeks could ignite the price of sugar.
CANE is the sugar ETF product
The most direct route for a risk position in the sugar market is via the futures and futures options on the Intercontinental Exchange. The Teucrium Sugar ETF product is an alternative for those who do not trade futures. The most recent top holdings of CANE include:
Source: Yahoo Finance
CANE holds a diversified portfolio of three sugar futures contracts. The ETF tends to underperform the price action in the sugar futures market on the upside but often outperforms sugar futures on the downside. The price volatility of deferred futures contracts is typically lower than the nearby contract.
Source: Yahoo Finance
The chart shows that while sugar futures rallied by nearly 45% from last September through October, CANE’s performance was lower. The ETF rose from a low at $6.46 last September to a high at $8.15 in October 2018, a rise of 26.2%. However, during the most recent decline, the price of October sugar futures fell from 12.30 on July 30 to 11.09 cents per pound on August 28 or 9.8%. Over the same period, CANE fell from $6.99 to $6.50 per share or 7% as the ETF outperformed the futures on the downside.
CANE has net assets of $9.42 million and trades an average of 24,321 shares each day. The ETF charges an expense ratio of 1%.
The price of sugar is falling, and the Brazilian real may be the culprit that is taking the sweet commodity on a path where it could challenge the 10 cents level once again. A repeat performance from last year could send the price of the sweet commodity lower over the coming days and weeks. However, a bounce in the Brazilian currency could be just what sugar needs to explode to the upside. Time will tell if 2019 turns out to be a copy of the price action last year.
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