The U.S. dollar’s rally, which started in mid-July and has continued through August, has led many commodities lower in the past few weeks. However, there is one unique commodity that hasn’t fallen with the rest, and that commodity is sugar.
Sugar is a unique commodity because it doesn’t necessarily follow the U.S. dollar as other commodities such as crude oil tend to do. You can see from the charts below that as the dollar strengthened over the past month, sugar remained steady and even made gains.
U.S. Dollar Index vs. Sugar
This is in sharp contrast to the beating that other commodities took when the dollar made large gains. You can see in the chart below the sharp dive crude oil took as the dollar strengthened.
U.S. Dollar Index vs. Crude Oil
The commodity market I am most bullish on is sugar because open interest is increasing while the market is closing in on new contract highs. This is a very strong technical signal.
Sugar fundamentals are also very supportive, with a world production deficit this year and the possibility of a major deficit next year. The USDA projects that the Ukraine’s sugar production will drop almost 50 percent next year from 17 million tons to just 9 million, due to a drop in planted acreage. This is just one country that is having this issue and there are others as well. Russia has refined 13 percent less sugar year-to-date.
The CFTC’s Commitment of Traders report on August 22 was bullish, with small speculative traders liquidating long positions, while index funds were increasing their long positions. Index funds are known as the “smart money.”
In the March sugar futures, 15 cents a pound has been a major resistance level. Every time this resistance level is tested, it becomes weaker and weaker. You can see from the chart below that the market tested it numerous times since the middle of July. I believe that sugar will eventually break through the 15-cent resistance level and continue on to 20.
I recommend taking a long-term bullish position in sugar by buying the March 2009 16-20 call spread at 73 ticks, or about $817 per spread, not including commissions. This option expires on February 17, 2009 and the underlying contract traded near 15.57 cents per pound as of this writing (August 26, 2008).
The risk of this trade is defined as what you invest, $817 per spread, and the maximum potential is limited to about $4,480 per spread, so the maximum net profit on this trade is $4,480 minus the $817 you pay for the spread, and any commissions.
By selling or shorting the 20-cent call you collect the premium to lower the cost of the 16 cent call. The maximum potential is realized at expiration if the underlying contract is at or over 20 cents. The breakeven level for this trade is at 16.73 cents. Anything above 16.73 would generate a profit, excluding commissions.
Frank D. Cholly is a Senior Market Strategist with Lind Plus. He can be reached at 888-801-9302 or via email at fdcholly@lind-waldock.com.
Futures trading involves substantial risk of loss and is not suitable for all investors.
Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.
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