Is the sugar bull dead or just wounded?

We believe, however, that exports will could leave India vulnerable. Domestic demand is not very elastic. Current ending stocks estimates are based on static domestic consumption growth to between 22 million and 23 million tonnes. We’ve seen estimates that put consumption at considerably higher levels for 2011-12 which would mean that India would be left with insignificant inventories. The last time Indian stocks were that low the government had to intervene by restricting sugar purchases to food manufactures and engineering a decline in demand. Before India got a grip on the situation by slashing import tariffs as well, sugar prices had their first trip to the 30¢ per pound level.

With strong crops in Thailand and Australia, in addition to the unusual Indian contribution to the export market, the Asian import markets will be comfortable in 2011-12. Higher output in Asia, however, is compromised by the unexpected fall in Brazilian output. Sugar analysts are forecasting a global sugar surplus for 2011-12 of about 5 million tonnes, but they have all slashed their estimates by several million tonnes to account for the drop in Brazilian output. Nevertheless, with a surplus, the fundamentals are not bullish.

Our concern about India, while hardly frivolous, is certainly premature and would really only come into play if there was a weak monsoon next spring. Nonetheless, we list it amongst potentially bullish factors.

Industrial commodities may have further to fall, but sugar is different. Prices – particularly in Brazil – are perilously close to the cost of production which means the incentive to expand acreage yet again for 2012-13 will not be there.

By any technical measure the market has become oversold. Open interest has shed 140,000 contracts since the market peaked in mid-August. Open interest continued to drop even after prices began to consolidate two weeks ago. That’s a classic indication of effective commercial support. In fact, Commitment of Trader figures show that commercials have been strong buyers. We believe that there is an excellent, low-risk opportunity to probe the long side for a trade – not a marriage. Buy March sugar, risking 24¢ per pound, close only.

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