A year-end sell-off is accelerating in raw sugar as concerns about demand are heightened by the new COVID variant, Omicron.
After a drop of almost 7% over two weeks, the question naturally popping into investors’ minds is whether this is a buying opportunity or is more patience required to lock in at the lower levels? If the latter is the case, then what should those levels be?
All charts courtesy of skcharting.com
Let’s Look at Sugar’s Fundamentals First
Raw sugar had one of its biggest rallies in 2020, gaining 15% as it rose virtually non-stop from May through December last year after COVID disruptions to production meant unusually low global supplies.
This year was even bigger for the sweetener, as it gained 25% through September before hitting a speed bump in the final quarter.
Now, raw sugar is up about 20% on the year after a recent stretch of red ink—particularly, back-to-back weekly drops of more than 3% over the past two weeks—forced by a deteriorating demand outlook.
“Weaker demand ideas were caused by reports of new lockdowns in Europe as COVID returns there, and as reports emerge of a new variant discovered in Africa,” said Jack Scoville, chief crop analyst at the Price Group Futures in Chicago.
“Reports indicate that consumer demand has returned to the market but not in a big way. Ideas are that the supplies are out there but it will take a stronger price to get them into the market.”
Scoville said Indian producers and exporters were willing sellers at above 20.50 cents a lb. That would be a premium of almost 2 cents over Thursday’s futures trade in New York, where raw sugar hovered at around 18.60 cents a lb.
In Brazil, the top sugar cane growing country, processors were refining cane more for the biofuel ethanol than sugar, Scoville said.
“Right now, this trend is expected to continue due to the relative price spreads. The reduced production potential from Brazil for the current harvest is still impacting the market as cane production suffered last season. Daily charts also show that trends are down.”
What Do The Technicals Say?
There is a buying opportunity in raw sugar, but it will likely be a limited one where the flat price reaches just under 19.50 cents a lb, said Sunil Kumar Dixit, chief technical strategist at skcharting.com.
But, the market could fall even further, to below 18 cents, presenting a continued shorting opportunity or chance to buy even lower, he said.
“We see a short-term relief rally from the lows, with potential targets of 19.20 and 19.28, which can extend to 19.48, subject to prices holding above 18.88,” said Dixit.
“Currently we don't see any major upside reversal beyond 19.50. The upside potential is limited to between 19.20 and 19.48.”
But the downside could also extend to 17.70, cautioned Dixit.
“The long term monthly chart is showing a bearish correction of two months, back to back and currently breaking below the previous months low,” he added.
Long or short, remember the trend is your friend; do temper your expectation with moderation.
Best of luck and a happy weekend.
Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold a position in the commodities and securities he writes about.