Volatile Commodities – Sugar & Corn
Sugar and corn have both been very volatile commodities recently and this has opened up numerous opportunities and risks. I'm going to provide an overview of what has happened recently in both markets, along with my outlook on where these commodities may be heading.
Sugar
We've had some nice moves in the sugar market. Sugar futures for March delivery rose 0.22 cent on January 30 to 12.42 cents a pound on ICE Futures U.S., formerly known as the New York Board of Trade. Just last week, on January 25, we saw a similar large move of 0.47 cent in the same contract. All this followed a steep decline during the week prior. As we can easily see from the chart below, volatility has definitely increased in this market.
The stock market meltdown after the Martin Luther King holiday on January 21 created a lot of liquidation in commodities across the board, on further concerns of a recession. The stock market and sugar market then bounced back nicely and continued to rally.
I believe we could see prices go above 13 cents and would recommend buying this market on dips. In my opinion, we could make new highs on the March contract at 13.09 cents a pound.
In the option market, locals have been buying calls and selling puts. The market saw a lot of in-the-money puts bought on January 28, namely the March 11.50 cent puts.
I'm expecting the price of sugar to increase. Looking at some of the fundamental news, Chinese sugar imports at around 1 million tons this year, which is about the same as 2007. However, with its growing economy, you can anticipate imports will rise in China. This will definitely have a strain on supply.
India has had some continued dryness in their sugar areas, so the market is looking for a little less production there. Since its economy is also growing pretty fast, you can expect an increase in its imports as well.
Buy this market on dips at any chance you get. Because of all the volatility, we've seen already some pretty good increases on options that were purchased last week.
There are about 450,000 March futures contracts that need to be rolled forward or liquidated before expiration on February 29. This should also increase the volatility.
There are some talks that the cash market needs to pull back a little further to entice import demand, which could bring another round of long liquidation. Look to buy dips and take any available profits.
Energy & Sugar
Crude oil has been trading higher, and that's also affected sugar. There is a lot of sugar-based ethanol in South America. In Brazil, the cars can switch over from ethanol to gasoline depending on which is cheaper at the time.
We're also seeing a better possibility of sugar-based ethanol being exported more, especially with corn prices being so high. Corn-based ethanol is not quite the savior that some are looking for it to be with demand for food increasing so much.
Crude oil has definitely had an influence on the sugar market. I would suggest keeping a close eye on the energy market when looking at sugar.
Corn
Corn traded near $5.01 a bushel on January 31. In the last few weeks the market has traded near all-time highs a few times. However, we did have some concerns that spilled over from the stock market. Last week, these concerns produced a limit down day on January 23 in the March and May contracts. The next day, the corn market bounced right back up and rallied to a limit up day. Despite the concerns present in the stock market, it seems hard for corn to keep weakness.
If you're risk-averse to volatility, you might want to keep away from corn for a little bit of time.
I believe this market is a little overbought. We did have about 93 million acres planted last year and a pretty good crop. The market will be waiting for the February 8 USDA baseline projections report to see where it comes in compared to the September numbers. The USDA forecast on February 8 will be key.
Fundamentally, basis levels were pretty steady. Farmer selling should pick up a little bit here. And the Argentine weather forecast hasn't changed too much. In South America, moisture is a little short in some areas, but there isn't too much stress and things are going along well so far. We'll have to see how the planting progresses.
With volatility so high, I would recommend staying away from the futures and instead looking at options. I recommend buying May or July puts. However, some of those puts are very pricey because of the high volatility. Therefore, I would recommend taking positions in some put spreads. Since prices are constantly changing, feel free to call me at 866-631-6216.
There is still a lot of volatility, and if the funds start unloading, this market could go quite a bit lower. The market dropped to as low as $4.69 a bushel on January 23, but bounced back pretty strong. With this market making lower lows recently, it could be setting up for a big sell-off.
I think we'll see a major correction through profit taking going into the spring planting. Weather will obviously be a factor in the coming months and the higher demand for corn worldwide cannot be overlooked.
Greg Milkovich is a Senior Market Strategist with Lind Plus. He can be reached at 866-631-6216 or via email at gmilkovich@lind-waldock.com.
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