Crisis creates opportunity. Reason often gets tossed out the window when fear fills the minds of traders. We’ve already seen this happen in a number of commodities including gasoline, natural gas, coffee and now, sugar. Sugar is priced in dollars on the world market but the costs to produce it are in other currencies. Brazil is the world’s biggest sugar producer by a long shot. Its currency, the real, has been hammered hard by the global scramble for dollars caused by the COVID-19 pandemic.
Data Source: Reuters/Datastream
The once mighty real, worth 44 cents in 2015, is now worth less than 19 cents. This means that the same dollar that once bought just 2.27 reals now buys 5.26 reals. Brazilian sugar farmers need less than half the number of dollars now to collect the same amount in reals as they did in 2015. Given this, it is not surprising to see sugar lower.
Real Not the Only Reason for Sugar’s Sour Disposition
Brazil’s automobiles are powered by a fuel mix skewed heavily towards ethanol, nearly all of which comes from refining sugar. Cheap crude oil and gasoline caused by the Saudi/Russian price war have reduced the advantages of sugar power at the same time COVID-19 is putting a lid on economic activity. This means fewer cars on the road and shorter trips for those who do venture out. When looked at from purely a demand perspective, the sweet stuff appears sour indeed.
But there is more to demand than just the slowing effects of the Coronavirus. The world’s population continues to grow rapidly. The 7.8 billion people walking the earth today will increase to 9 billion in no time. They all need to eat. And demand is not the only factor when it comes to the price of sugar. Like all agricultural commodities, sugar is subject to the whims of Mother Nature. One or two bad crops in a key growing area could cause its price to rise rapidly.
Sugar Testing Long-Term Support
As the chart below illustrates, the 10 cents per pound level had been sugar’s “line in the sand.” The last time the sweet stuff dipped below 10 cents was during the recession of 2009. Expectations that COVID-19 will result in a worse recession – many are even predicting a Depression – have weighed on the market. But will the ultimate result of COVID-19 actually be a classic Depression?
Data Source: Reuters/Datastream
As we pointed out in our blog post on gold earlier today, the Midas metal certainly doesn’t think so. Combine $5 to $6 trillion in stimulus with a faster-than-expected economic rebound and you get a formula for classic price inflation the likes of which the modern economy hasn’t seen in generations. Inflation has the potential to ravage the purchasing power of all reserve currencies – including the dollar. This is part of the reason why, at $1,700 per ounce, gold is just 13% short of hitting its all-time highs.
Unlike some of the other undervalued commodities we’ve featured in this space, sugar is still unloved and under the radar. RMB trading customers may want to consider buying May 2021 13.00-cent sugar calls, looking for the sweet stuff to bounce off the 10-cent level and test its old swing high just short of 16-cents, sometime over the next twelve months. Fair value for these calls is $616 as we write this. They will be worth at least $3.360 should May 2021 sugar futures hit our 16.00-cent objective prior to option expiration on April 16, 2021. Your maximum risk on this trade is the amount paid for each call plus transaction cost. Prices can and will change so contact your RMB Group broker for the latest.
Take Initial Risk “Off the Table” in Natural Gas
We didn’t think natural gas would spend a long-time beneath its “line in the sand” price of $2.00 and the October futures certainly have not. The bankruptcy train for shale drillers is starting to gain momentum. Once it does, supplies will dry up as bankrupt wells get taken offline. Back month futures are beginning to price this in. The October $2.50 calls we suggested purchasing in late February have benefitted as a result. They are currently bid at $1,410 each.
RMB Group trading customers who purchased more than one of these options may want to consider selling half, taking your initial risk off the table in the process. Continue to hold the balance for a move to our first upside objective of $2.90 in the October futures contract. Prices can and will change. Contact your RMB group broker for the latest.
Please be advised that you need a futures account to trade the markets in this post. The RMB Group has been helping its clientele trade futures and options since 1991. RMB Group brokers are familiar with the option strategies described in this report. Call us toll-free at 800-345-7026 or 312-373-4970 (direct) for more information and/or to open a trading account. Or visit our website at www.rmbgroup.com. Want to know more about trading futures and options? Download our FREE Report, the RMB Group “Short Course in Futures and Options.”
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The RMB Group
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