By Kevin Grewal, Editorial Director at www.SmartStops.net
Over the past few weeks, sugar has been in an upward rally pushing the commodity to a 28-year high, but can this sweetness be sustained or is it all speculation?
From a global supply perspective, sugar is in trouble and many think that the supply shortfall will extend through 2010. India, the world’s second largest sugar producing nation, is witnessing weak monsoon rains, which are the main source for irrigation for the nation’s farmers, resulting in drought-like conditions and damaged sugar cane crop.
In Latin America, Brazil, the world’s largest sugar producing nation, is having the opposite problem where excessive rainfall is hampering harvest and creating problems for sugar crop. To put it into perspective, the International Sugar Organization has stated that global demand will exceed output by as much as 5 million tons in the year through September 2010. This demand will remain intact, if not even increase, as populations in emerging markets continue to increase and demand food.
Opponents of the rally suggest that prices will not be sustained because these sugar producing nation’s will most likely boost production of sugar, due to its current price levels, which inevitably will result in more sugar on the market in future years.
In a nutshell, for the near future, the fundamentals of the sweet commodity look appealing and it appears that supply and demand pressures should enable sugar to sustain its price levels. As for the long-term, only time will tell if production will outpace demand and influence the overall health of the commodity.
Some equities that have rallied as a result of the most recent surge in sugar are the following:
PowerShares Agriculture ETF (DBA), which is composed of sugar, wheat, soybeans and corn, is up 15.6% from a $22.50 close in March to close at $26.02 on Tuesday.
iShares MSCI Brazil Index (EWZ) closed at $59.51 on Tuesday after witnessing a $31.75 low in March, an increase of 87%.
iPath MSCI India Index ETN (INP), more than doubling from a March close of $24.13 to close at $51.00 on Tuesday
Imperial Sugar Company (IPSU), jumping 173% from its March low of $5.15 to close at 14.08 on Tuesday
One thing to keep in mind is that sugar is a commodity and commodities are known to be volatile and come with risks. To help mitigate these risks, an exit strategy is important. According to the latest data from www.SmartStops.net, an upward trend in the previously mentioned equities could potentially come to an end at the following price points: DBA at $25.30; EWZ at $55.50; INP at $49.75; IPSU at $12.78. These price levels change on a daily basis as the markets fluctuate and updated data can be accessed at www.SmartStops.net.
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