Andrew Hecht CANE Games SGAR SGG SGGB

Price Consolidation Is Healthy For The Sugar Market – Teucrium Sugar Fund (NYSEARCA:CANE)

Sugar Continues To Sweeten - Teucrium Sugar Fund (NYSEARCA:CANE)

Sugar is among the most risky commodities that commerce within the futures market. Since 1971, the worth vary within the sugar market on the Intercontinental Trade has been from 2.29 to 66 cents per pound. The highs and the lows occurred many years in the past.

Over the previous decade, sugar traded from lows of 9.44 cents per pound in 2008 to highs of 36.08 cents in 2011. On Friday, November 9 the close by March future contract settled at 12.73 cents per pound, lots nearer to the low finish than the excessive finish of the buying and selling vary. In September, close by futures hit a low at 9.83 cents per pound, simply zero.39 cents above the 2008 low. The worth fell under the August 2015 backside at 10.13 cents which was a important technical help degree for the candy commodity as the worth had not been decrease than 10 cents since 2008.

Sugar fell to the underside finish of its pricing cycle in September and skilled a pointy rebound in October that took the worth over 40% larger in a single month. The worth motion in September and October was a reminder of the vast worth variance within the sugar futures market. The Teucrium Sugar EFT (CANE) and iPath B Bloomberg Sugar Complete Return ETN product (SGGB) are wonderful devices that replicate the worth motion within the sugar futures market for many who don’t commerce futures.

Sugar rejects the underside of its pricing cycle in September

The worth of sugar futures discovered at the least a short lived backside through the week of September 24 as October futures rolled to the brand new lively month which is March.

Supply: CQG

Because the weekly chart highlights, the expiring October contract fell to a low of 9.83 cents per pound whereas the brand new lively month March contract fell to 10.80 cents. The low on the continual futures contract was the bottom degree for the candy commodity since 2008.

I had been writing that ultimately sugar would discover a backside because it was at a degree the place manufacturing was more likely to decline, and demand would improve at discount basement costs inflicting inventories to drop. Nevertheless, it was the bounce within the Brazilian actual that possible brought on the restoration within the sugar futures market as Brazil is the world’s main producer of sugarcane. The election of Jair Bolsonaro as President of the main financial system of South America brought on the actual to recuperate, and the worth of sugar adopted. Sugar moved from 9.83 to 14.24 cents by the week of October 22, an increase of 44.9% in a single month. The transfer was extraordinary and an indication that sugar had rejected the lows which have been doubtless on the backside finish of the pricing cycle for the mushy commodity. Sugar broke under its technical help at 10.13 which was the August 2015 low, however might solely handle one other zero.30 cents on the draw back earlier than the worth reversal.

Over 40% positive factors from the lows result in a correction

After reaching a peak at 14.24 cents on October 24, gravity hit the excessive-flying sugar market.

Supply: CQG

Because the every day chart illustrates, the worth of sugar has been making decrease highs and decrease lows because the late October peak and was buying and selling under the 13 cents per pound degree on the shut of enterprise on Friday, November 9. Open curiosity, the whole variety of open lengthy and brief positions within the ICE sugar futures market has been flatlining across the 775,00zero-contract degree over current weeks. Price momentum on the day by day chart has declined into oversold territory together with relative power. After reaching a excessive of over 40% in early October, day by day historic worth volatility has fallen to beneath the 20% degree in current periods as the worth of sugar continues to right to the draw back.

44.9% features led to a corrective interval within the sugar market that would drive it again to the midpoint of its buying and selling vary since late September.

12 cents per pound is the brand new pivot level within the sugar market which is wholesome

The 50% retracement degree of the transfer from 9.83 to 14.24 cents per pound stands at simply over 12 cents per pound which is the primary degree of technical help for the March sugar futures contract. After a commodity market makes a big correction from the underside or prime finish of a pricing cycle, it tends to settle right into a buying and selling vary that’s larger than the low and decrease than the excessive.

Within the case of sugar futures, the rejection of the bottom worth in a decade at beneath 10 cents per pound led to an virtually 45% restoration. Nevertheless, the transfer to the upside ran out of steam, and the worth started a sluggish and regular retreat because the candy commodity has been edging decrease since late October.

The day by day chart exhibits that the primary degree of technical help might be on the mid-September excessive at 12.55 cents that occurred when March sugar futures have been on their solution to lows at 10.80 cents. Nevertheless, the 50% retracement degree at 12 cents per pound is more likely to be probably the most vital goal in the course of the present corrective transfer from the excessive. Fairly often, when a commodity market rejects a worth on the backside finish of its pricing cycle and rebounds sharply, a interval of correction and sideways buying and selling could be a wholesome sample for the longer term. Constructing a worth base at a better degree than the lows typically prepares a marketplace for additional worth positive aspects sooner or later.

In the meantime, one of many elements that despatched sugar decrease, after which brought about a restoration was the worth motion within the U.S. greenback versus Brazilian actual overseas trade relationship.

Watch the U.S. greenback and the Brazilian actual

Because the world’s main producer of sugarcane, the extent of the native currencies impacts the conduct of producers and millers that may change the output from the South American nation. Sugar futures commerce in dollars on the Intercontinental Trade, however manufacturing prices in Brazil are based mostly on the worth of the actual. The strain on the worth of the actual put further promoting strain on sugar in greenback phrases in 2018 as the worth in native foreign money didn’t drop as a lot because it did in dollars on a proportion foundation resulting in the regular manufacturing stream.

Supply: CQG

Because the weekly chart highlights, the Brazilian actual fell from zero.32005 through the week of January 22 to a low of zero.23725 in late August towards the U.S. greenback, a decline of 25.9%. The change fee remained close to the lows by way of the week of September 17. Because the starting of 2018, the worth of close by ICE sugar futures declined from 15.37 cents to lows of 9.83 cents, a drop of 36%. Subsequently, the worth of sugar in Brazilian actual phrases didn’t drop by even 10% over the interval. The current rebound in the actual because the Presidential election approached took the foreign money from the lows to a excessive of zero.2788 which helped to ignite a restoration within the worth of the candy commodity. Whereas sugar futures moved 44.9% greater, the actual recovered by 17.5%, so the sugar rally in actual phrases was lower than in greenback phrases.

It’s probably that future strikes within the Brazilian foreign money will trigger worth volatility within the sugar futures market. On the similar time, the greenback index was shifting in the direction of a brand new excessive for 2018 as of Friday, November 9 which is more likely to put strain on all commodities costs, and sugar is not any exception. A brand new excessive within the greenback index over the approaching periods might push the worth of March sugar futures again right down to the 12 cents per pound degree.

In the meantime, apart from the foreign money market, probably the most influential issue for the sugar market as we head into 2019 would be the climate circumstances in main rising areas all over the world. With international demand for all commodities rising due to inhabitants and wealth enlargement, annually the world should produce extra agricultural commodities to maintain tempo with rising demand. Whereas sugar was in a situation of oversupply in 2018, that doesn’t warranty it won’t transfer right into a deficit in 2019 and past. The lower cost over the previous months might result in manufacturing declines as producers change to different extra worthwhile crops which might trigger inventories to say no and the worth to rise.

CANE and SGGB do a superb job monitoring the candy commodity

I used to be very bullish on the worth of sugar because it was heading in the direction of its September lows, however the rally of just about 45% in a single month has curbed my bullish enthusiasm for the candy commodity because it rose above the 14 cents per pound degree. Whereas I will not be a purchaser of sugar on the lookout for larger costs at this level, I proceed to be a dealer of sugar trying to benefit from brief-time period worth volatility. Extensive worth variance might grow to be the hallmark of the market because it makes an attempt to create a base or maybe a pivot level across the 12 cents per pound degree within the coming days and weeks.

Sugar futures and futures choices are extremely liquid leveraged instruments which might be probably the most direct path to buying and selling or investing sooner or later worth of the mushy commodity. For those that don’t commerce within the futures area, CANE and SGGB present two options. The fund abstract for CANE states:

“The investment seeks to have the daily changes in percentage terms of the shares’ NAV reflect the daily changes in percentage terms of a weighted average of the closing settlement prices for three futures contracts for sugar that are traded on ICE Futures US. The fund seeks to achieve its investment objective by investing under normal market conditions in Benchmark Component Futures Contracts or, in certain circumstances, in other Sugar Futures Contracts traded on ICE Futures or the New York Mercantile Exchange (“NYMEX”), or on overseas exchanges.”

Whereas probably the most liquid futures contracts commerce on ICE, the NYMEX provides money-settled futures on sugar. The CANE product does a superb job replicating the worth motion within the sugar futures market as a result of it holds these contracts. The most up-to-date prime holdings of CANE embrace:

Supply: Yahoo Finance

CANE appreciated with the worth of sugar on its ascent from the lows and has been falling through the present corrective interval.

Supply: Barchart

Because the chart exhibits, CANE rose from $6.46 in late September to a excessive of $eight.15 when sugar futures made the excessive, an increase of 26.2%. Whereas the return was decrease than the 44.9% rise within the worth of sugar on the weekly chart, the mix of three deferred sugar futures contracts skilled a decrease proportion achieve than the close by futures contract on ICE. March sugar declined from the excessive at 14.24 on October 24 to shut on the 12.73 degree on November 9, a drop of 14.1%. Over the identical interval, CANE moved from $eight.15 to $7.50 per share, or eight% decrease, so CANE outperformed sugar futures on the draw back due to the mix of futures contracts. CANE has $14.42 million in internet belongings and trades a mean of over 86,00zero shares every day making it a liquid product.

With regards to the iPath B Bloomberg Sugar Complete Return ETN product (SGGB), the fund abstract states:

“The investment seeks return linked to the performance of the Bloomberg Sugar Subindex Total Return. The ETN offers exposure to futures contracts and not direct exposure to the physical commodities. The index is composed of one or more futures contracts on the relevant commodity (the “index components”) and is meant to mirror the returns which might be probably out there by way of (1) an unleveraged funding in these contracts plus (2) the speed of curiosity that could possibly be earned on money collateral invested in specified Treasury Payments.”

Given its current efficiency, it’s possible that SGGB holds sugar futures contracts and swaps which are nearer to the close by contracts than the deferred contracts held by CANE.

Supply: Barchart

Because the chart exhibits, through the current rally, SGGB moved from $37.19 to $48.97 per share or 31.7%, beating the efficiency of CANE on the upside whereas nonetheless underperforming absolutely the return within the consecutive sugar futures contract. Through the right SGGB fell from the excessive on October 24 to shut on November 9 at $43.99 per share, a decline of 10.2% which was a smaller loss than the sugar futures experiences, however a extra vital decline than the CANE ETF product. SGGB has internet belongings of $29.13 million and trades a mean of 14,769 shares every day making it additionally a liquid product for buyers and merchants within the sugar futures market.

A warning in relation to each the CANE ETF and SGGB ETN merchandise is that they endure from time decay when the sugar market is in contango, or deferred costs are greater than close by costs. When the funds roll their contracts from one contract to the subsequent, contango means they need to pay a better worth to take care of the lengthy place. Nevertheless, if sugar have been to enter a backwardation the place deferred costs have been decrease than close by costs, each merchandise would decide up a credit score throughout roll durations.

I are likely to choose the CANE ETF to the SGGB ETN for 2 causes. As an ETN, SGGB entails a further degree of danger as the customer assumes the credit score publicity relating to efficiency by the administrator. On the earth of ETFs, the administrator shouldn’t be an issuer of a word, however a caretaker of positions that the fund holds to offer efficiency. The second cause is that CANE’s strategy that blends three lively futures contracts can soften the blow on the draw back when the worth of sugar falls. Whereas there’s a little bit of alternative danger on the upside with regards to CANE’s efficiency, the danger of financial loss tends to be a bit decrease within the ETF product.

A interval of worth consolidation within the sugar market might be wholesome for the longer term efficiency of the mushy commodity. A buying and selling vary will supply market members the chance to purchase dips and promote rallies to grind out some candy returns within the risky sugar market over the approaching weeks and months. Hold your eyes on these currencies; they might trigger further worth variance and surprises of any vital strikes happen. Lively month March futures have been buying and selling on the 12.82 cents per pound degree on Monday, November 12.

The Hecht Commodity Report is among the most complete commodities stories obtainable at present from the #2 ranked writer in each commodities and valuable metals. My weekly report covers the market actions of 20 totally different commodities and offers bullish, bearish and impartial calls; directional buying and selling suggestions, and actionable concepts for merchants. Greater than 120 subscribers are deriving actual worth from the Hecht Commodity Report.

Disclosure: I/we now have no positions in any shares talked about, and no plans to provoke any positions inside the subsequent 72 hours.

I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (aside from from Looking for Alpha). I’ve no enterprise relationship with any firm whose inventory is talked about on this article.

Further disclosure: The writer all the time has positions in commodities markets in futures, choices, ETF/ETN merchandise, and commodity equities. These lengthy and brief positions have a tendency to vary on an intraday foundation.

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