Sugar: Can this bear absorb an Indian crop failure?

Early forecasts for the 2013-14 global sugar balance call for a surplus, albeit a smaller one than in the current marketing year. Farmers in some Northern Hemisphere beet producing countries, such as Russia, the Ukraine, and the US, are expected to divert sugar area to more profitable crops. Grain and oilseed prices, for example, have fallen from lofty bull market levels, but are still far above their historical norms, leaving farmers with much more potential for profits.

We believe that these projections for 2013-14 do not include the recent developments in India. Nor do they take into account the high probability that the sugar/ethanol ratio in Brazil is being overestimated, as we discussed above.

Commodity fund managers have been increasing their bets on the short side – even now, at the 18¢-per-pound level, which would seem to be counterintuitive, were they to consider that they are selling sugar short at prices that are well below the cost of production. The net-short position is at a multi-year high (Chart 2).

Our January 31 recommendation, to avoid jumping on the long side just yet, stands. We do, however, continue to advise buying call options. Implied volatility levels have jumped a bit, but are still near historic lows and present the best opportunity for bulls. Buy July 19 or October 20 calls.

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