Sugar Down In The Dumps But For How Long?

September 14, 2007

Name: Robert Schroeder

Company: MF Global

Years Trading: 14

Favorite Movie: Goodfellas

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No rally off Ethanol?

The sugar market has been on a long term down trend since July of 2006. This is a bit surprising since corn has been just the opposite as a consistent bull during this time. Much of corn’s rally has been attributed to the ethanol phenomenon. Whether you believe in Ethanol or not, and the opinions do vary, sugar and not corn, is the primary source of ethanol. All energies are either at or close to all time highs. Crude oil trading around $80 a barrel and sugar is the cheapest it has ever been relative to crude oil. Sugar’s 20 percent decline this year has left it so cheap that investors can buy almost eight sugar contracts for every one of crude oil, the most in over 20 years. A ton of crude oil on the New York Mercantile Exchange today costs more than 2.5 times more than a ton of sugar on the New York Board of Trade. For the past decade, the two commodities traded at about the same average price. It is like that the spread should start to correct.

Weather Threatens Stockpiles

While there is a projected surplus of almost 11 million metric tons of sugar, bad weather is always a scare to shrink the stock pile in quickly. It is conceivable that sugar could more than double in price to 19 cents/lb with any kind of storm damage. It traded at these prices as early as February of 2006 which is rather recent. Even if there is a global slowdown it shouldn’t affect sugar. The world should continue to consume a lot sugar both for food and now energy.

CHINA

Mc Donald’s Corp., the world’s largest restaurant company, plans to have 1,000 new stores in China at the minimum with in the next year. Yum! Brands Inc., the owner of Taco Bell, Pizza Hut and KFC, plans to add at least 400 Chinese locations. There is almost 1.5 billon people in China and 3 billion in Asia as a whole. This population has never really had a significant influence on a commodities rally in the past. As they start to have a bigger affect on commodities demand it is very plausible that commodities prices are still exceptionally low in real terms and should be considered attractive long term investments.

Trade Recommendation

Normally I would like to see a technical buy signal before I would be willing to go long any commodity. At best, you can argue a technical bottoming formation in sugar but certainly it has not yet turned up. Therefore, I am looking at options as the best way to play a possible sugar rally. The options are attractive because volatility in sugar is near 20 year lows. The low volatility results in cheaper than normal option prices. I am recommending buying October of 2008 12 cent calls. Currently October 2008 sugar is trading at around 10 cents. The options have been trading between 27-32 ticks. Sugar is priced at 11.20 per tick so each option would cost from $302-$358. What I find most appealing about these options is they have 365 days left till expiration. If you are interested in speaking further on this or have any questions feel free to give me a call. Best of luck to all.

About the Author

Robert Schroeder is one of the founders and original members of the Advantage Traders Group at MF Global. Advantage Traders is a special division of MF Global, which one of the world’s leading providers of brokerage services in futures and options to both institutional and private clients. Advantage Traders has a strong and growing history of helping investors achieve their investment goals. We work as a team dedicated to providing clients and outstanding combination of service and market insight. We provide the private client with the information and service only institutional clients usually receive. There are currently six brokers that work for the Advantage Traders. To reach Robert Schroeder with questions or for further information call 1.800.888.6484