From Sweet To Sour?
Sugar prices have steadily weakened since they peaked at USc30.40/lb in early February, and are currently trading at USc24.60/lb. I think the technical picture is deteriorating, and this combined with expectations of a loosening market in 2011 suggests that the rally I initially highlighted in August 2009, may be coming to an end.
The monthly, weekly and daily charts all point to additional downside over coming months, with key momentum indicators also suggesting that sugar prices have peaked. The monthly chart shows a negative technical pattern forming. First, a monthly close around current levels would be ominous, as it would likely presage further downside. Second, the monthly relative strength index (RSI) has turned out of overbought territory and is heading lower. Third the RSI failed to make a new high when sugar prices hit a new high in February, which is suggestive of bearish divergence. Fourth, other momentum indicators such as slow stochastics and the MACD are turning lower.
To be sure, the rapid rise in sugar prices came on the back of a shortfall in Indian production in 2009 and 2010, which dragged the global sugar market into deficit for two consecutive years (see chart). Having said, I expect an increase in sugar production over the next two years which will see the sugar market post surpluses in 2011 and 2012 and help normalise the market. Higher prices in 2009 and 2010, has curtailed demand somewhat and provided an incentive to increase production (expected to come online in 2010/2011). I see the stocks-to-use ratio falling to a record low of 17.7% in 2010, but should start heading higher in 2011 and 2012, which will lead to a slow normalisation of the sugar market.
Ideally, I would try to short sugar upon a rally to the USc26.00 /b area. Upon such a retracement, I would initially only target a move to about USc20-18/lb, given that the market will still be tight on a historical basis in 2010 and 2011.