I recently sat down with one of the brokers from the Commercial Grain Division of RJO and he proceeded to fill me in on the new software for Ethanol Risk Management. I was somewhat surprised as I thought this was a small market and the research and copyright filing can run into a few pesos. He smiled and told me they have 25 new plants coming on line this year.

As I thought about the projected overhang in the corn I started to get a handle on sweeteners. I knew that the Ethanol usage was going up and I paused as I thought about Brazil and its recent statement that it was 100% energy efficient. Since they control about 15% of the world sugar market I decided to see just how much sugar they would need to stay at this level.

Sure enough they were at their limit of production and it became apparent that it was time to hit the charts. As I took out the one-year chart I saw some promise but when I pulled the 25-year it became transparent. If sugar took out 6.80 it was going to run. The charts were right. Now back to the fundamentals. I got a hold of a chart showing China Sugar Consumption (Figure 1). As China is an unknown factor this was important.

I then coupled this with world stocks and/or surplus (Figure 2). As you can see we have been this low before on the stockpiles. Considering current consumption, however, this is new turf.

At this point the charts looked right and the fundamentals were lining up. But now was the time for a good look at abstract. What's in store for the weather? The projection is for lots of hurricanes and a possibility of hot and dry in South America. What do other traders think? The bullish consensus is at the mid 50s-60s. It was time to put out my first buy recommendation.

As we started to layer in our longs we had a little damage to our sugar from Hurricane Katrina. I know that it takes a lot to kill a sugar cane crop but the story gave us a few hundred points and a chance to buy some more long positions. Then the other shoe fell off and bounced twice. Sao Paulo announced that demand for its hydrous ethanol had shot through the roof. They projected that they needed to increase production of cane to meet demand and had made plans to plant 2.5 million acres of sugar cane. As this was no small notice, sugar blasted off and started its second leg up. Just to plant a few million acres would take them 2-3 years.

The second bounce was imports into the US from Mexico. We agreed to allow Mexico to ship 268,000 short tons of sugar without tariffs. What had happened was the crop in Louisiana was all right but the largest crushing plant Imperial Co. was severely damaged. We were going to have sugar shortfalls and we had to turn to our neighbors down south.

So we had bad weather, gigantic consumption, very low storage, and shortfalls in South America. What could get us through ten cents and start another run to the old highs at 15 cents? The one thing I had overlooked - the funds and their computers that have no emotion and just sit and crunch numbers all day. They didn't care about shortages or the fact that the price had just doubled. They just wanted it and they use market orders to get it. We punched through fourteen cents like it wasn't there.

Now with $3.00 gas in our mind and crude at $70 a barrel the scramble for alternative fuels is on in earnest. All the time eroding global stockpiles and all the while forcing sugar higher. My twenty year charts are no good at this point and the 25 year charts show the back side of this move. So I head down to my basement were I have my old hand charts stored. I don't mean to scare the children but yes we did them by hand back in the olden days and yes I did walk to school. I also have the hand charts my father kept from the 40 years he traded before he sponsored me to my seat.

As I pulled the old cracking chart pages open I saw what had happened in the past. The market puffed along at a very steady pace. No funds to set it on fire so the velocity was steady but the grail I was looking for was the date and the high set back in 1974. I got it and it was the second week in February and that target price was 28 cents.

I believe we can get there again. If I'm wrong, my stops will be filled. But if this monster punches through twenty-eight the next (historical) target is 36.50. Wow! Stay tuned and never let a winner turn into a loser.

A second generation trader and former floor trader, Pete Thomas is a senior broker and market analyst for RJOFutures, 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 or by calling 888.894.6529 or 312.373.5392.