Time to Pour Some Sugar Futures into Your Portfolio?

Down and out sugar may provide the boost your portfolio needs in the second half of the year. 

Since hitting its all-time contract high back in February 2011 at more than 36 cents, sugar has experienced a relatively steady five-year decline into the teens as ideal weather helped boost yields from Brazil to India.

Lately though the global ICE raw sugar contract #11 $SB_F has gotten rather sleepy. Checking the daily chart, the front-month contract has consolidated into a two-and-a-half cent range between 17.5 and 19 cents dating back to February.

Screen Shot 2014-07-06 at 6.55.37 PM

What could break sugar’s sleepy spell? El Niño.

In fact, the last time sugar experienced the bull market run of a generation, between 2009 and 2011, it was the last time we had a significant El Niño event. A combination of deadly flooding in Pakistan, a deeply disappointing rainy season in India and uncooperative weather in Australia led to record prices with an initial peak above 30 cents in February 2010 and then its all-time high a year later.

This time around though the world has more sugar than it needs. In fact, the expired July contact saw its lowest delivery of raw sugar since 2000 thanks to the supply glut. Furthermore, the International Sugar Organization forecasts global production will exceed demand for a fourth straight year in the season ending in 2014. This kind of data is making analysts and futures traders wax bearish. But there is one problem: prices can’t seem to break 17.45.

Instead, let’s discuss a vastly different scenario that remains as-of-this-moment extremely plausible.

With forecasters predicting a 90% chance of El Nino this year, sugar crops from Australia to Brazil and India are vulnerable. In a typical El Niño cycle, the Indian monsoon cycle is weaker than usual, leading to below-average rainfall and thus smaller sugarcane yields. And so far this cycle is looking weaker for the world’s second largest sugar exporter. In fact, experts have already started calling for a drought with monsoon rains at their lowest level in five years.

In the short term, the market appears to be balancing the weather concerns with the voluminous supply. Who knows, rains may return (like for wheat crops in the Midwest) or remain elusive. Once this months-long trading range is broken, I’ll look to enter long above 19 cents or short below 17.50, depending on how the market plays out.

For now we must wait for Mother Earth and the whims of price action to determine our move.

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