views

Tight supply drives sugar even higher

IT MAY not attract the same attention as crude oil or gold, but the potential for multi-decade highs means that white sugar deserves a closer look from spread betters looking to diversify their trading portfolio.<br /><br />Raw sugar futures hit three-year peaks of at the end of last week with New York&rsquo;s October contract touching a session high of 18.86 cents per pound. A rally beyond 20 cents per pound would be the highest on the monthly charts for sugar in 28 years. <br /><br />In London, the front month white sugar contract hit a three-year peak of $492.80. Sugar has now rallied more than 45 per cent year-to-date and is the third most rising commodity in 2009.<br /><br />The sugar price has been climbing steadily higher amid concerns about weather-related production problems in Brazil and India. Brazil is the world&rsquo;s largest producer of raw sugar but heavy rains in the South American country indicate that total production will be well below expectations. <br /><br />India, the world&rsquo;s biggest consumer of sugar, is expected to import up to 5m tonnes of sugar in 2009/10 due to strong domestic demand and sharply lower output, merchant Sucden Financial said earlier this week in its quarterly market report. <br /><br />India grows a lot of sugarcane but drought in Uttar Pradesh, which accounts for one-third of India&rsquo;s sugarcane production, has raised the possibility of steep downward revisions to India&rsquo;s production outlook in 2009/10 in the face of strong domestic demand, say Morgan Stanley analysts in a research note.<br /><strong><br /></strong><strong>SQUEEZING UPWARDS</strong><br />Not only is tighter supply squeezing the sugar price upwards, so too is speculator activity. &ldquo;Commodity Futures Trading Commission data indicate that speculators are buying sugar again. It is risky to come to the party this late, but the growing open interest in March 2011 $0.30/lb calls an option to buy at this price indicates just how high hopes are running,&rdquo; Morgan Stanley adds. <br /><br />However, Lloyds TSB&rsquo;s senior technical analyst Paul Rodriguez warns that that while sugar continues to rise towards long-term targets, the commodity may need to consolidate gains in the short-term. <br /><br />In such a situation, we may see a period of rangebound sideways trading, perfect for day traders looking to capture a few points&rsquo; profit here and there, but less profitable for directional traders.<br /><br />All the major spread betting providers offer raw sugar contracts to their clients. IG Index offers trading on Liffe Sugar No 5 between 8.45 and 17.30 Monday to Friday with a spread of two basis points and a minimum trade size of &pound;15.<br /><br />GFT offers spread betting on both London sugar and US Sugar No 11 Futures. With the latter, the spread is 0.06 with an 8 per cent margin. Trading hours are between 3.30-14.00 US Eastern time.<br /><br />While sugar might be nearing strong resistance levels, spread betters can look to buy on the dips in the near-term and then wait to see whether the commodity breaks through the multi-decade highs or reverses lower.