Sugar: Still Sweet To Buy At 4-Year High?

It’s the dilemma for anyone peering into a market that’s taken off without them. Is there still time to join the party, without getting burned? For ​​sugar, the answer appears to be yes.

There are more sweet highs, according to fundamentals and technical charts, for new longs willing to take the dive in this market, which is already up 26% on the year. Indeed, the agricultural commodity is running one of the longest commodity rallies—just two months in the negative out of the last 16.

The crux of the sugar story is weather, and there’s a lot of it that’s crummy now in Brazil, which in any year is either the crop’s largest or second biggest grower while almost always being its top exporter. 

The peculiarity in Brazil’s sugar supply is due to the position of the crop’s other major producer—India—which barely grows enough of the sweetener for its own needs.

Sugar Daily

All charts courtesy of SK Dixit Charting

Brazil overtook India as the largest sugar producer in the 2019–2020 crop year, turning out 29.93 million metric tons. The U.S. Department of Agriculture has officially forecast that Brazil’s sugar output will rise more than 40% to above 42 million tons in 2020–2021.

Calamitously Cold Weather

The problem with the USDA forecast was that it came out before the weather turned disasterously frigid recently in Brazil’s sugar-growing patches, after an earlier drought.

Jack Scoville, chief crop analyst at Chicago’s Price Futures Group, said in a note posted on the brokerage’s website on Tuesday that the squeeze on Brazil’s sugar supply due to weather woes will not resolve fast enough. 

“Temperatures have moderated in Brazil,” Scoville said. “But ideas are that the damage from previous freezes and drought episodes should show up in processing data for August.” 

Sugar Weekly Chart

Pierre Santoul, chief executive officer in Brazil for France-based sugar grower Tereos SCA, said the company’s sugar-cane crushing may drop to the lowest level since the 2009-10 season, to 16.6 million metric tons. That would be a 21% drop from the 20.9 million crushed in 2020-21, he told Bloomberg.

Even as mills have sped up harvesting to avoid further cane deterioration, the extent of the decline in quality is still unknown, suggesting further crop downgrades are possible, Santoul said.

The weather crisis has triggered downward revisions in Brazil's Center-South sugar production estimates to levels as low as 490 million metric tons, or a 19% decline versus the previous crop, Bloomberg added. In the second half of July, sugar content in cane declined in the region from a year ago. Cane yield, meanwhile, dropped 18%, industry group Unica said in a report Tuesday.

In addition to the frost, most of the sugar-cane fields in the Center-South have faced soil water levels of below 10%, compared with the 60% minimum required for crop development, according to Somar Meteorologia.

Sugar Monthly Chart

Santoul said the situation may brighten with a weather break by October and normal rain in the subsequent months.

Sugar Prices Could Remain High Next 18 Months

While the weather prediction was upbeat, Santoul's crop outlook was more on the pessimistic side, as he forecast that Brazil’s worst weather in decades will exacerbate an already tight global supply situation in sugar and have a lasting impact on prices, already at 2017 highs.

As a consequence, high sugar prices could last as long as 18 months, said Santoul, adding:

“We are getting into a boom cycle for the commodity’s prices.”

In Tuesday’s trade on ICE, or the InterContinental Exchange, raw sugar’s benchmark front-month contract hit 19.62 cents a lb, the highest since the March 2017 peak of 19.84. 

How much higher can it go from there, would be the question for anyone taking up a fresh long position in sugar.

The answer might be in the technicals plotted by Sunil Kumar Dixit of SK Dixit Charting in Kolkata, India, who shows a potential rise to the October 2016 record high of 23.90 cents if the current trendline isn’t broken.

Said Dixit:

 “Sugar has confirmed its 18.94-cent resistance with strong momentum and stands tall above 19.50 on the monthly chart.”

 New Record High Above 23.90-Cents Possible

Dixit said the Stochastic RSI, or Relative Strength Index, in sugar was also bullishly positioned with a reading of 84/80 that showed a so-called golden cross over from below the 80 line that hinted at a continued upside move to between 20.50 and 21.50 cents.

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.