The recent bull market in sugar was somewhat predictable but don’t fret if you were late because there may be more to go. Here is how it has played out so far. Brazil in 2004 announced it was 100% energy efficient. This makes sense because it controls about 15% of the world sugar market and is a heavy producer of ethanol. But how much sugar would they need to stay at this level?
Turns out Brazil was at its limit of production. Looking at a one-year chart the first part of 2004 indicated strength, but the 25-year chart shows a much greater potential move. If sugar took out 6.80¢ per pound it was going to run. The charts were right, but the fundamentals held more promise (see “Supply and demand”). Not only did the demand side look bullish, but global inventories were down (see “World sugar”).
Technical and supply and demand factors supported a move above 8¢ by 2005, but what of the intangible, weather? The projection was for an active hurricane season and a hot and dry period for South America. It was time to buy again.
As sugar continued its steady move, damage from Hurricane Katrina pushed it a few hundred points higher. Then the other shoe fell and bounced twice. The Brazilian government announced that demand for its hydrous ethanol had shot through the roof. They projected they needed to increase production of cane to meet demand and planned to plant 2.5 million acres of sugar cane. To plant a few million acres would take two to three years. Sugar prices blasted off and started a second leg up. Another bounce occurred when the United States agreed to allow Mexico to ship 268,000 short tons of sugar without tariffs. The crop in Louisiana was O.K., but the largest crushing plant, Imperial Company, was severely damaged. The United States was going to have sugar shortfalls and we had to turn to our southern neighbors.
Bad weather, high consumption, low storage and shortfalls in South America goosed prices. But what could get us through 10¢ and start another run to the old highs at 15¢? Heavy fund buying. Funds don’t care about shortages or that the price had just doubled. They just wanted it and used market orders to buy it. Sugar punched through 14¢ like it wasn’t there.
Now with $3.00 per gallon gasoline and crude at $70 a barrel, the scramble for alternative fuels intensified. All the time eroding global stockpiles were forcing sugar higher. The 20-year charts are no good at this point and the 25-year charts give a glimpse of when sugar was at these levels. To get the whole picture only 40-year charts would suffice.
The 40-year chart showed an active sugar market though one not throttled by huge fund activity like the current one. More important, it gave us the clue we were looking for. In the second week of February 1974, sugar set a high of 28¢.
Can we get there again? Yes. Probably not without some painful corrections, but if this monster punches through 28¢ the next historical target is 36.50¢ Wow! Stay tuned.
Pete Thomas is a broker for RJO Futures, the retail division of R.J. O’Brien, and has been actively involved in the markets for more than 30 years. He can be contacted at pthomas@rjofutures.com.
