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Position: Short sugar via the etf SGG

 

Sugar has been leading the recent commodity sell off.  In fact, sugar prices have been on a downward slope since their 30-year highs in February of $0.36/pound, falling roughly 40% since then, and sugar is now one of the most underperforming major commodities year-to-date, down roughly -16%.  Despite this dramatic sell off, on a year-over-year basis the price of sugar is still up more than +40%, which we believe doesn’t reflect the coming supply/demand imbalance.

More recently, sugar rose for the 4th day in New York yesterday, the longest streak in more than 3 months, mostly due to -69% year-over-year lower production during spring harvest from Brazil, the top sugar producing nation.  Production fell from 2.56 million metric tons to 795,000 metric tons from mid-March to the end of April.

 

Setting aside the short-term supply issues in Brazil, the International Sugar Organization (ISC) estimated last week that world supply, however, would exceed demand for the 2010-2011 season by 779,000 metric tons, despite the current slower flow of product from Brazil. 

Our view, which is more bearish than the ISC, and consistent with a recent report from The Kingsman Group, a commodities market analysis and research firm, is that sugar’s excess supply level would be even greater, with a potential oversupply of north of 5.2 metric tons.  The driver of this oversupply is more tepid demand growth combined with supply growth of more than 6% on a year-over-year basis.

From a correlation perspective, our correlation analysis appears to support this increased focus on supply and demand.  While sugar has been the beneficiary of a weak dollar over the past two years, similar to the broader commodity complex, sugar has recently lost its strong negative correlation to the U.S. dollar.  In fact, over the past 6-weeks, sugar’s correlation to the U.S. dollar is a statistically insignificant +0.15, with an r-squared of 0.02.

As the Inflation continues to deflate, we like sugar on the short side.  Our levels are outlined below.

Daryl G. Jones

Managing Director

Dead Cat Bounce Aside, the Sugar Market Is In Oversupply - 1