Will sugar be sweet again?
In June 2005, the sugar prices broke out of a resistance level that had formed on the monthly chart. The breakout level was around the 9.40 cents level, but the run that continued came close to the 20 cents mark in February 2006, or around USD 11,000 per contract. The increasing demand for Ethanol and cuts in European sugar beat production, was the said reason for this run. Funds participation is a more likely reason, since the price of sugar dropped to around 9.20 cents. 
The price now being around 10.30 cents after having traded in a sideways channel since the low was made in June 2007.
With a spot of hindsight, could we use the run of 2005 – 2006, as a indicator of what could come? Let’s look at the noise. At this time Ethanol was said to be necessary to help the world economy overcome, at the time ridiculously high prices of oil, which traded at around USD 60 in June 2005. On the 7 of November 2007, the November oil contract (CLZ07) traded as high as USD 98.62 at more than 50% higher price than in 2005. In 2005, the European Union began to cut back on the production of sugar beats in an effort to support third world production of sugar. This sent signals of lower sugar production through the market seemingly feeding an uptrend. Today, the Ethanol is considered the only viable alternative to oil. But there are indications, that could change some ideas about Ethanol production. With higher oil prices, the popularity of corn and soy products as an alternative source of energy, has increased. This has prompted some organisations to protest in the name of human rights. The claim is that by using food products for fuel, the human population is missing out on important source of nourishment. The use of corn and soy products as a basis for Ethanol production is therefore against political correct thinking. The sugar on the other hand is a product that has a bad reputation in the food arena. All over the world, people are urged to decrease the consumption of sugar, making the sugar in fact an ideal alternative for Ethanol production.
But how do the technical indications read. If we look at the daily chart, the sugar has been stopped at a resistance level close to 10.55 cents, the price of the sugar Mars 2008 contract (SBH08) which dropped to 9.22 cents on June 14 2007, making it the low after the 2005 – 2006 rally. Since the low was formed, the sugar has been trading in a horizontal tunnel.
The monthly chart shows an interesting development. The low after the 2005 – 2006 rally was formed at a similar price level as a horizontal trading range that was formed in 2005, just before big rally. The present price range has formed a resistance few cents above that point. The Slow Stochastic indicator (SSTO) also has bullish indications as it’s returning from the oversold area and showing a firm upward sign. 
That the sugar prices are trading in a narrow area between strong support and resistance indicates a breakout of substantial force. The SSTO indicate that this breakout will be towards higher prices.
Another thing on the daily chart worth noting, is the Commitment of Traders (COT) report. There it can be seen that more large investors, or funds, are coming into the market the last few weeks. Before the big rally of 2005 – 2006, the COT showed the large investors as shorts and the commercials as long, just before it turned. Similar indications have been visible in the COT report, the large participation increasing every week.
The next few months will be interesting for the development of the sugar prices. A possible break through the 11 cent mark, could result in an aggressive move of the sugar prices. A target of about 20 cents could easily be set, as it was the top in 2005. But a price of around 66 cents could also be possible, as that was the price level sugar hit in 1974, and that’s not including a backward revaluation of the USD. The rise in oil prices just show that the highest possible price few years ago, are no longer the highest possible prices. It goes way beyond that.
