WILL IT BE DÉJÀ VU IN SUGAR?
It has been a pretty torrid time for sugar traders over the past year. The market has seen a mere 286 point range since the beginning of November with a predominantly downward trend. However, traders are pointing to the fact that the market was in a very similar position a year ago.
At the end of September last year prices were languishing at their lowest level for over 10 years. Then during October prices rallied 424 points. As is often the case when the market sees a sharp move it was because the funds covered shorts during the period. They held a net short position of just under 177k lots on the 11th September 2018. By the end of October 2018 they had covered their entire short position and had gone marginally long. Currently (middle of September) prices have hit their lowest level for a year and the funds currently (11th September) hold their largest net short position ever (-230k lots). So it is little wonder that traders are predicting (hoping?) a similar price move during October this year.
Before looking at the reasons and probability of history repeating itself it should be understood that this article was written shortly after prices dragged themselves slightly off the lows, so by publication a move higher may have been confirmed. Alternatively, prices could have slid lower yet again. However, as any experienced trader knows, direction is the easy bit and timing is tougher to get right. It is very similar when writing an article before the deadline!
Apart from a similar fund position what other factors may point to an autumn rally? Firstly, the seasonal trend is for prices to improve early in the last quarter of the year. This is for a couple of reasons. Firstly, the October/March spreads are generally at a discount so it means a gap higher on the first month continuous chart on the October expiry. This is because the Brazilian CS harvest is still at full throttle in September whereas in February it has only just started. Additionally, there is always uncertainty regarding the Brazilian harvest. Will the tail be short as the rains arrive early or a late start if the rains are slow to clear? Secondly, once October is off the board it is another six months before the next expiry. Therefore, producers tend to relax at this point from a pricing point of view. They are under no time pressure to price physical contracts so any fund buying is likely to meet with limited scale up producers selling, especially if prices are weak.
Chart 1: Seasonality Chart 18 vs 19
15 14 13 12 11 10 9
SBc1 2018 SBc1 2019
Source: ADMISI Sugar Desk
14 | ADMISI - The Ghost In The Machine | September/October 2019
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