The global sugar market has been in a bear decline for the last six years and recently hit a six-year low. Could we be reaching a local bottom in the sugar market?
There are five strong reasons why the sugar market has continued to fall, and three reasons why the price will reverse in the near term.
1. Global Supplies Are High
Global sugar stocks are high and have continually weighed on prices. Additionally, the producers haven’t begun cutting supply.
2. Little Incentive for Producers to Switch
Producers of cane, the largest input for raw sugar, usually switch crops when sugar prices fall. However, all other agricultural commodities are low as well. This reduces the likelihood of producers switching to another agricultural good.
3. The Strong U.S. Dollar
The strong dollar has had a negative impact on the price of all global commodities, sugar included. Further, a strong U.S. dollar promotes increased production in key sugar exporting countries such as Brazil, due to the fact that value can be captured from growing sugar in Brazilian real and then selling it for U.S dollars into the world market. The real has been one of the hardest hit currencies against the dollar, recently hitting a 12-year low.
4. Sustained Low Oil Prices
Low oil prices cause low demand for biofuels, such as ethanol, which is sugar based.
5. Global Health Concerns
You can’t deny the rising global health concerns regarding sugar intake, with awareness regarding the negative effects of sugar on the rise. Sugar has already been clearly linked to diseases such as obesity and diabetes.
Now that we’ve looked at some price drivers, let’s look at why sugar might make a profitable trade.
1. Seasonal Trends in Sugar
Sugar prices move in a fairly predictable seasonal price pattern. Seasonally, September is the weakest month for Sugar futures price performance.
2. Smart Money Moves Suggest Sugar Price Increase
Commercial producers of sugar know the market best because they are most familiar with the conditions on the ground. Their buying and selling activities usually move opposite to price movements in the market at large. Using the Commitment of Traders report, we can monitor the weekly activity of these market players and trade accordingly. Recently, commercial players in the sugar markets have been heavily shorting the market, implying an upward price move in the near future.
3. Prices at Six-Year Lows
While sugar could continue to go down forever, there is less risk to dipping a toe in the long position since prices are at six-year lows. After all, the price is backed by a real asset, which will always sell for something!