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