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

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

Those that comply with my articles right here on Looking for Alpha or subscribe to my weekly report at Market know that I had been shopping for sugar within the futures and ETF/ETN markets as the worth dissolved over previous months. Sugar moved from 23.90 cents per pound in October 2016 to lows of 9.83 cents in September as the worth dissolved like a lump of the candy commodity in a scorching cup of espresso. The worth of the beans that percolate into the java fell like a stone alongside the worth of the sweetener.

Sugar had traded to a low of 10.13 cents in August 2015 earlier than it discovered a degree that turned out to be the underside of its worth cycle and the worth greater than doubled over the next fourteen months. A deficit within the sugar market that started to develop at simply over the 10 cents per pound degree in 2015 gave option to a glut that despatched the worth reeling and to a decrease low in September of this yr.

I didn’t assume that sugar would fall under its 10.13 August 2015 backside, nevertheless it did in one other instance of how difficult it’s to select bottoms or tops in any commodities market. Once I first acquired into this enterprise within the early 1980s, a boss advised me that once you try to select a backside, you often wind up with a unclean finger and a fist filled with losses. When sugar put up that print that was zero.30 cents under the earlier backside in September, I felt somewhat sick to my abdomen. Visions of 1985, when sugar traded at 2.29 cents per pound danced in my head. At the moment, I instructed shopping for the candy commodity within the futures market, and my boss responded by asking me why I might ever need to purchase one thing that eating places give away at no cost?

I caught with my lengthy positions as the worth of sugar soured and fell to a decrease low, however in lower than one month, all of these ugly purchases turned candy once more as the worth of sugar discovered a backside and has posted a powerful achieve.

The low finish of the pricing cycle – the actual and actuality set up a backside

On the finish of September, the worth of close by sugar futures hit their lowest worth since 2008 and traded under 10 cents for the primary time in a decade. The final time the candy commodity pierced the ten-cents degree was in June 2008 when sugar futures fell to lows of 9.44 cents per pound. The expiring October futures contract on the Intercontinental Change fell to a low of 9.83 cents per pound in what now seems to be like a end result of a bear market that started in October 2016 at 23.90 cents and ended on the finish of the October-March roll interval.

Sugar had been declining steadily as elevated manufacturing from Brazil and India and a falling Brazilian actual weighed on the worth of the delicate commodity.

Supply: CQG

Because the month-to-month chart highlights, the worth of close by sugar futures greater than halved in worth falling from 23.90 to 9.83 cents per pound, a drop of 58.5%. Open curiosity on ICE futures rose as the worth moved progressively decrease, and worth momentum and relative power fell into oversold territory on the month-to-month chart.

Commodities are likely to fall to ranges the place manufacturing declines, demand will increase, and inventories start to drop. On the backside or prime of a pricing cycle, it’s typically a problem to select the turning level when a market will shift from bull to bear or vice versa. Hindsight is twenty-twenty, and within the sugar market, it’s telling us that the candy commodity discovered the underside finish of its pricing cycle at 9.83 cents per pound on the finish of September. One of many sparks which will have ignited the sugar futures market is the election in Brazil that lifted the worth of the Brazilian actual towards the U.S. greenback.

Supply: CQG

Brazil is the world’s main free-market sugar producer. Subsequently, the worth of the native foreign money can have a big influence on the worth of a commodity. Whereas sugar declined steadily in 2018, the actual dropped from zero.32005 towards the greenback at the beginning of the yr to a low of zero.23725 in late August, a drop of 25.9%. The autumn within the worth of the actual offset the decline within the worth of sugar for Brazilian sugarcane farmers and millers because the candy commodity makes use of the greenback as its benchmark pricing foreign money. The lower of the actual resulted in much less of a loss within the home worth of sugar in Brazil.

The bottom worth for sugar in a decade and a backside in the actual going into an election in Brazil that would increase the native financial system was an injection of actuality into the sugar futures market, and the worth took off to the upside.

40% in underneath one month

After a twenty-4 month interval of promoting and decrease lows within the sugar futures market, the worth turned and exploded to the upside this month.

Supply: CQG

Because the chart exhibits, sugar moved from 9.83 in late September to highs of 13.95 cents as of October 18, an increase of 41.9% in lower than one month. On the month-to-month chart, there’s mild resistance at simply over the 14 cents per pound degree, and a few congestion on the 15-15.5 cent degree. The worth motion within the sugar market has been spectacular over the previous three weeks.

In the meantime, the lively month March futures contract that’s now approaching the 14 cents per pound degree reached a low of 10.80 cents in late September and a excessive of 13.95 on October 18, so the full return on an extended place within the March futures from the low stands at 29.2%

I’ve been in revenue-taking mode, promoting the lengthy positions that have been wanting fairly bitter as futures fell to decade lows final month. Whereas I stay lengthy the candy commodity, my place is half the dimensions it was on the lows, and I’ll proceed to decrease my danger profile within the sugar market, by shifting my horizon from lengthy to brief-time period alternatives. My lengthy place as the worth approached and finally fell under the ten-cents per pound degree was based mostly on a view that sugar was approaching the underside finish of its pricing cycle. Markets not often transfer in a straight line. It’s probably that the risky sugar market will start to supply numerous alternative on the lengthy and brief aspect of the market over the approaching weeks and months now that the worth has moved appreciably above the newest decade low.

CANE and SGGB – a comparability of outcomes

ETF and ETN merchandise have elevated buying and selling exercise and liquidity on the planet of commodities and within the sugar market since their introduction. These merchandise have additionally made it attainable for market individuals who don’t commerce within the risky and leveraged futures area to take part in uncooked materials markets. On the planet of sugar, SGGB is an ETN and CANE an ETF that makes an attempt to duplicate the worth motion within the candy commodity. The fund abstract for the iPath Bloomberg Sugar Complete Return ETN (SGGB) states:

The funding seeks return linked to the efficiency of the Bloomberg Sugar Subindex Complete Return. The ETN presents publicity to futures contracts and never direct publicity to the bodily commodities. The index consists of a number of futures contracts on the related commodity (the “index components”) and is meant to mirror the returns which might be probably out there by means 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.

Because the abstract states, the ETN holds futures positions within the sugar market to duplicate worth motion.

Supply: Barchart

Because the chart exhibits, SGGB didn’t hit its low in late September when sugar futures discovered their backside; quite it fell to its nadir in late August at $36.50 per share. In late September, SGGB hit a low of $37.19 when the worth of sugar futures fell under the 10 cents per pound degree and to its low. On October 18, as the worth of close by sugar futures have been buying and selling at slightly below 14 cents per pound and had recovered by 29.2%, SGGB was up by 28.7% from its late September backside because the ETN marginally underperformed the futures within the candy commodity.

The Teucrium Sugar ETF product (CANE) holds three ICE sugar futures contracts in its portfolio.

Supply: Yahoo Finance

The fund abstract for CANE states:

The funding seeks to have the every day modifications in proportion phrases of the shares’ NAV mirror the every day modifications in proportion phrases of a weighted common of the closing settlement costs for 3 futures contracts for sugar which might be traded on ICE Futures US. The fund seeks to realize its funding goal by investing underneath regular market circumstances in Benchmark Element Futures Contracts or, in sure circumstances, in different Sugar Futures Contracts traded on ICE Futures or the New York Mercantile Trade (NYMEX), or on overseas exchanges.

Supply: Barchart

CANE moved from a low of $6.46 in late September to $eight.01 on October 18, an increase of 24%, under each sugar futures and the SGGB ETN. CANE costs a better expense ratio which weighs on returns and divides its efficiency between three futures contracts. Whereas March futures rallied by 29.2%, the rally within the Might contract over the interval amounted to 27.eight%, and the March 2020 futures contract rose by 20.9%, the blended return of 26% accounts for the decrease efficiency of the CANE in comparison with the SGGB product. On the draw back, the mix of three contracts might decrease the danger of the ETF throughout corrections to the draw back.

One cause why I favor CANE

Whereas I favor the blended strategy to CANE’s holdings, I all the time favor an ETF over an ETN product. Regardless of its greater expense ratio, CANE displays solely the danger of the sugar futures market. ETN merchandise embrace a further danger. Holders of SGGB or different ETNs assume the danger of the credit score of the issuer of the Change Traded Notice.

There are various ETF and ETN merchandise on the market out there in the present day and given their success; it’s probably that many extra will come to market throughout all asset courses. The credit score danger inherent in ETN merchandise provides one other degree of danger that may influence efficiency.

Ranges to observe over the approaching weeks

ICE March sugar futures settled at 13.87 cents per pound on October 18. The contract traded to a excessive of 13.95 cents in the course of the session which was the very best worth since April 9 and one tick above the June 1 peak at 13.94 cents per pound.

Supply: CQG

Because the day by day chart exhibits, the subsequent degree of technical resistance stands on the 14.90 cents, the early March excessive. Open curiosity has declined considerably from over 1.060 million contracts in late August to its present degree at 754,192 contracts as of October 17. A continuation of the rally within the sugar futures market might depend upon an increase within the metric as greater open curiosity, and rising worth is usually a technical validation of an rising bullish development in a futures market. Moreover, worth momentum and relative power measures have moved into an overbought situation which might create circumstances the place the rally runs out of steam in coming periods.

Supply: CQG

On the weekly chart, a double prime at 15.49 cents per pound courting again to November 2017 stands as important technical resistance for the candy commodity. Above there, a 50% retracement of the transfer from the October 2016 excessive at 23.90 cents and September 2018 low at 9.83 cents stands at 16.86 cents which could possibly be a goal for lengthy positions.

Many elements will decide the trail of least resistance for the worth of sugar over the approaching days, weeks, and months. Provide and demand knowledge proceed to level to a glut situation within the smooth commodity. In the meantime, the trail of the Brazilian actual towards the U.S. greenback might affect the worth of sugar. A continuation of the restoration in the actual might present help for the worth of the candy commodity. Lastly, since sugar tends to be a extremely risky futures market, a return of speculators on the lengthy aspect might exacerbate the present worth development and restoration and push costs to technical ranges on the upside. Control the open curiosity metric for indicators that speculative curiosity is returning to the market on the lengthy aspect because the current transfer might tempt development-following merchants to hope on the candy and bullish freight practice that has pushed the worth of the commodity over 40% greater from the late September low.

In the meantime, there’s one different issue to observe when contemplating an extended place in sugar today. The weekly chart shows a niche that occurred as October rolled to March. The hole is from 10.86 to 11.03 from the top of September to the start of October. Worth motion tends to fill these voids on charts which function a warning signal for the market that is still in a state of oversupply.

I’ve taken income on half my sugar positions and will probably be utilizing a trailing cease nicely above the extent of the hole. If worth motion takes sugar again right down to fill the void, I need to be able to reestablish an extended place at a degree I consider is near the low finish of the pricing cycle for the candy commodity. One of the bullish elements for the sugar market is the growing variety of shoppers all over the world. Because the flip of this century, the variety of individuals on the earth has grown by 25% from six to seven and one-half billion. Sugar is a staple, and extra individuals across the globe signifies that the addressable marketplace for demand has elevated which ought to maintain the low finish of the cycle across the 10 cents per pound degree or greater within the months and years forward.

The Hecht Commodity Report is among the most complete commodities stories out there 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 have now 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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