The madness of sugar #11
The sugar has gone mad, or so they say. One recommendation following the 17. of January run was “Buyer beware: there are no limits on price movements on the #11 world sugar contract. We suggest longs take the money and run. One veteran trader we spoke with said that he had never seen anything like this situation before.” So what was it he’d never seen before, the run in the March contract setting a low of 12.10 cents and a high of 12.65 or 0.55 cents in the pit trade? Or was it the low of 11.74 cents to 13.09 or 1.39 cents in the electronic trade? If we look at the March 2006 contract, the pit traded a low of 16.82 to a high of 18.08 or 1.26 cents on the 24 of January 2006. This is a bit more than the 0.55 cents of 2008. The Thursday was not the biggest pit trade ever. Even comparing it to the electronic trade, were looking at 1.39 vs. 1.26 cents, or .13 cents. Sugar 
prices can be volatile, that’s nothing new. Any one looking to trade sugar, or any other commodity for that matter, should focus on the big picture. Do their own analysis and make their own decisions.
So what was happening in sugar. On the 16 of January a rumour started floating around that a Brazilian hedger was heavily loaded with speculative positions and would be told forced to liquidate them. When trade commenced on the 17, it had been confirmed that Fluxo-Cane Overseas and affiliates had more than their hedging positions on the market. It was expected that these positions would be liquidated during the day. It seems that Fluxo had been pushing the market down the last nine months. The market took off reaching new highs with little or nothing stopping it, contrary to the runners up of last week, when the market tried two times to set new highs but was always aggressively pushed down.
We can expect an increased buying power in relation to Fluxo liquidation had a lot to do with the run, but there was also a heavy fund buying into the market plus some producers sold into it. The London white sugar made a big jump as well, showing some overall strength in the market. The question that needs to be answered is how did Fluxo affect the market. Were the bulls held down due to Fluxo short selling or was the run on Thursday a side effect of the Fluxo liquidation? The answer 
is probably a little bit of both. We’ve seen bullish sentiments in the sugar, but it had never managed to quite get off, Fluxo shorting being a plausible reason for it. The run on Thursday was no doubt supported by Fluxo liquidation, at least the expectation of it.
So what’s the future of sugar? Well we can expect a pullback following this run, as there always will be profit taking and a certain tension relief following large runs. But the monthly chart is bullish as well as the weekly chart. The daily chart is on the other hand showing signs of a possible pull back. If Fluxo has managed to manipulate the market, all manipulations could affect the signals of the technical indicators as they’re not measuring the “real” behaviour of the market. This could be especially relevant to the daily chart. In a way the market needs to trade few days in this Fluxo-free environment, before anything can be analysed from a technical stand point.
When looking at the markets in general, it’s been strange, how ethanol has pushed corn up the shaft, but seems to have no effect on sugar. It’s true that the US is focusing on corn based ethanol, but when looking at the production of ethanol, sugar produces about eight times more energy than corn. Sugar is basically the most logical choice when looking at ethanol. It has more energy coming out of it and it’s not a friendly food substance, while the use of corn as energy base, has become politically 
incorrect. Sugar based ethanol will be more common and countries that will look towards ethanol will most likely be looking at sugar based ethanol. When comparing sugar prices to corn and oil prices, the price of sugar is cheap, even if it would race towards 66 cents like in 1974. It got there then and comparing the buying power of 66 cents in ’74 and 2008, sugar has plenty of room to the upside. Is it possible that sugar prices have been Fluxoed, holding back the bulls? On the fundamental side, sugar prices will rise and ultimately pass the high of 2006.
From the technical point of view, sugar is facing a resistance area up to around 12.50 cents on the March contract and a firm close above that is a definite bullish sign. It could take some time to pass it, so a drop in prices, which should be expected, does not mean that the bull is over. In fact, a pause in the bullish run, could give the support for higher prices. One thing is certain, the next few days are going to be interesting.
For information purposes, persons or entities associated with this website had open positions in sugar at the time of this writing.
