01-07-2008: March Sugar: Ethanol Use Sops Up Surpluses
The world appears to be awash with sugar. Production is up from the previous year as farmers switch acreage to take advantage of recent higher prices. But the ending stocks are deceptive. It seems commodities and stocks both have zeroed in on ethanol-related operations as the most promising in the recent downbeat economy. While other groups struggle, these groups find strength in the promise that finally America and others will do something about dependence upon foreign oil.
World sugar has become an ethanol play. In the not-to-recent past, analyses prepared by oil companies suggested that more energy was required to extract a product from grains, i.e more oil was used up that way, than was saved by switching to biodiesel and other fuels. Whatever happened to that analysis we don't know, but it is clear from recent charts that rising fossil fuel costs have crossed over the line of ethanol costs, and without protective tariffs, Brazil seems ready to export large quantities of ethanol to the U.S. Part of the analysis consists of which grains are used to produce ethanol, and stacked up against all of them is sugar, which seems to be a much more efficient source of energy than say, corn or soybeans. Once we heard that wheat could not be used to produce ethanol, but rising prices suggest that even wheat is a potentially economic source. That remains subject to check!
At any rate, investors have gone ga-ga over ethanol and anything related to it. Funds have not lost sight of this as they drive up the price of sugar. We have seldom seen such a high Decision Matrix rating on a commodity as appears in this article for sugar. Conditions seem to lining up for a sugar take-off. Fasten your seat belts!
March Sugar:
March Sugar:
Last November the USDA said that 2007-2008 world sugar production would total 167.1 million tons, up from 164.1 million tons the previous year. World ending stocks are expected to increase 5.1 million tons to 46.6 million tons, or 28% of annual use. Brazil is expected to produce 32.1 million tons of sugar in 2007-2008, up 2% from the previous year. A USDA spokesperson also said that Brazil is expected to produce 20.75 billion liters of ethanol, up 16% from the previous year. This data is often revised as far back as four years or more. Most Brazilian sugar production is made from a region close to Sao Paulo, as shown on the map below.
Czarnikow Sugar (a large trader) preducted that the world would have a 10.5 million ton surplus in 2007-2008, after adding 10 million tons in 2006-2007. Sugar is grown on every continent except Antartica, and producers are responding with more production. China is expected to produce a large crop of sugar this season, but this is offset by a reduction in India's crop size. Local officials believe India's production will be 28 million tons, not the 33 million feared earlier. A weak U.S. Dollar and rising gold prices are also providing support to the sugar market. Indonesia plans to issue import permits for 110,000 tonnes of white sugar for buffer stock this year. International energy prices are now high enough to discourage increased exports of ethanol from Brazil. (They need it at home.) Brazil exported 242.8 million liters of ethanol last month which is down from 283.7 million liters the previous year. China will buy 500,000 tonnes of white sugar for its state reserve from its own growersin an attempt to help support local prices after the market fell 3% since November. China will produce a record 13.5 million tonnes versus 12 million tonnes last year. World sugar prices reached a 10-month high in the last trading session. Large funds are buying and trade houses are covering shorts. Producers are selling into the rally. Funds are also buying all the biofuel commodities now, corn, soybeans, and wheat in addition to sugar. Most of those markets are trading at new contract highs. Ethanol producing company stocks are going against the equities bear market and making new highs on anticipation of much higher earnings. A U.S. energy bill signed in December will permit more Brazilian cane-ethanol to be imported into this country. Brazil's cash crystal sugar price index for mill gates in Sao Paulo rose in the previous week. The U.S. bill requires more auto-fuel come from renewable sources, but mandates that only some of that fuel can be corn-ethanol while the rest must be cane-based or other fuel stock. CalPERS is expected to buy commodity futures represented in the Goldman Sachs Commodity Index, which includes sugar.
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I CSCE- Mar-08 Sugar #11 World, 112klb c/lb Cm.=0.03 Lim.= 0.8
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The above point-and-figure chart is giving a conventional buy signal.
We are shortly to be headed toward a cyclical high and are in a seasonal up period.
Our best-performing internal program is "%R." It is giving a buy signal.
Results of "DCV" for Palladium (blue lines = successful trades, red, unsuccessful): (Always in the market.)
Our third system has just triggered a buy signal. (Note, disregard the year date on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)
The point value is $1,120. Initial margin on a single contract is $910. Use of options is not advised.
Scale traders are not a factor in this price range.
In the chart below, the yellow line is the futures price, read on the right axis. All other colors are read on the left axis. Red is small speculators. Green is large speculators. Blue is commercials. Large speculators with the best track record are getting increasingly-long.
The average volatility shown below suggests that a major change in direction to down is imminent at a volatility low point.
Our option trade recommendation is to Sell the World Sugar May 12 Put @ 0.89 or better.
Here's an intraday chart for the previous day ( 1/04 ).
Risk Versus Opportunity Report
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SBH8 March Sugar #11
High Price: 12.39
Current Price: 11.32
Low Price: 10.79
Risk: 0.091
Opportunity: 0.185
(O/R) Ratio = 2.019
Level Table:
| Factors | Weighted Points |
|---|---|
| Parabolic Chart | + 1 |
| Nirvana Chart | + 1 |
| News | + 1 |
| Point & Figure | + 1 |
| Cyclicals | + 1 |
| Seasonals | + 1 |
| Internal System 1 | + 1 |
| Internal System 2 | 0 |
| Third System | - 1 |
| Commitment of Traders | + 1 |
| Historic Range | 0 |
| Range/Volatility | - 1 |
| Level Table | + 1 |
| Other Factors | + 1 |
| Total | + 8 |
Place 16 March World Sugar on a Buy Watch with stoploss @ -0.69 below the get-in point.________________________________________________________________________________________________________C.H.
