After two hurtful years of double-digit losses back-to-back, things may be looking up for investors still faithful to their sugar.
Lower Brazilian sugarcane production and broadly higher crude oil and gasoline prices since the start of 2019 have brightened the outlook for sugar and its biofuel derivative ethanol.
Sugar Weekly Chart
The result is a near 10-percent gain year-to-date in U.S. raw sugar futures, which last saw a positive year in 2016. The commodity lost 21 percent last year and 29 percent in 2017.
Bullish Trend Replaces ‘False’ Downside
Mike Seery, commodity analyst and trader at Seery Futures in Plainfield, Illinois, noted on Tuesday that raw sugar futures were trading above their 20- and 100-Day Moving Averages, after what he described as a false breakout to the downside two weeks ago.
Seery attributed the price rebound to reduced Brazilian output. According to the country’s sugarcane industry association Unica, 2018/19 center-south sugar production through December was down nearly 27 percent at 26.4 million metric tonnes.
Output in the South American country, which is the world’s largest sugarcane grower, was down by as much as 43 percent in the first half of October after rains delayed cane processing and mills continued to favor ethanol production over sugar, Unica reported.
Brazil Making Strong Play Of Sugar For Ethanol
Brazil has a 27 percent mandate for ethanol in its gasoline, far higher than the 10 percent imposed on most U.S. motor fuels. That has prompted the country’s sugarcane growers to focus more on the energy industry than on food for their market, a strategy paying dividends now with the slide in their production and the powerful year-opening rally in crude oil.
Jack Scoville, analyst for sugar and other soft commodities at The Price Futures Group in Chicago, said:
“Brazil has been using a majority of its sugarcane harvest to produce ethanol this year instead of sugar. And dry conditions continue in northern Brazil and there are frequent rains in Rio Grande do Sul.”
As of their January 15 settlement, U.S. West Texas Intermediate (WTI) crude futures were up nearly 15 percent since the start of the year. Futures of U.S. gasoline were 6 percent higher while those of ethanol showed a near 2 percent gain.
The front-month March futures contract for U.S. raw sugar hovers at 13.18 cents per lb, a two-month high. It closed 2018 at 12.03 cents, after the near 25 percent slump in WTI crude pulled it down from the 2017 settlement of 15.16 cents.
Seery noted the impact of this year’s higher WTI prices on both ethanol and its primary product: “Crude oil prices have also stabilized and that is also supporting sugar at this time.”
No Certainty Of Sweet Ending Yet
Investing.com’s daily technical outlook has an all-clear “Strong Buy” on March sugar.
Even so, it’s too early to predict whether sugar’s sweet run will continue through the year, especially given the current volatility in oil markets – the result of multiple variables which analysts say make it virtually impossible to forecast trends or prices reliably.
Seery also said he’s mindful of the possibility of a sharp retracement in the contract, although he does not see it happening right away. He said:
“I’m certainly not recommending any type of bearish position as I will be looking at a bullish position on some type of price retracement as the risk at this time would be 1.6 cents, plus slippage & commission, which is too much for this commodity due to the fact of its low volatility.”
“Keep a close eye on this market if we get some type of pull back where the risk would be around 1.0 cent as that would be the proper entry point in my opinion.”