A few weeks ago, we heard reports that sugar prices would rise because of weather conditions and supply/demand factors. Sugar prices recently hit a 28-year high, trading at 23 cents per pound.
New data suggests that sugar prices may drop as much as 24%, according to Craig Ruffolo of McKeany Falvel company. He says that markets are already anticipating lower prices well before the next Brazilian harvest.
Traders look at the price of futures contracts and the "spread" (price difference set between contract months.) Sugar contracts are traded in January, March, July, and October. This is the level at which various distant contracts are trading: The nearest October contract on the ICE exchange traded at 23.68 cents per pound this week. The October 2010 contract traded at 20.88 cents per pound and the March 2012 contract traded at 16.85 cents per pound. This pattern shows that buyers a less willing to pay up for sugar going forward into next year and the year after.
Analysts say that sugar may run higher in the near term, but may fall back to 18 cents per pound by next May.
Sugar prices are getting too high and buyers are canceling orders or holding off on new orders. Egypt canceled a tender for 50,000 tons. Pakistan, Asia's third largest consumer doesn't plan to import more sugar. With freight fees it costs 78 cents per kilogram, 30 cents over domestic prices.
Markets like sugar rally to a point and then the price goes out of reach for some importers. It is at this point that the rally stalls and prices fall back.
Would you go short the sugar market at these levels?
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