Sweet Talk - Sugar Technicals

Introduction

I have had the privilege over the past 15 years of supporting many commodity buying teams at Mars, one of the larger categories being sugar. Mars Wrigley is a private, family-owned company producing not only confectionary but also pet food, including well-known brands such as Whiskas and Pedigree as well as other ‘human’ foods, such as Dolmio. You might be surprised to know that Mars Wrigley also owns Banfield, a chain of pet hospitals in the US. Mars is one of the largest food manufacturing companies in the world - not just Mars bars folks!

Mars, Incorporated offers a variety of delicious brands that bring joy to people all over the world. Many of our products contain sugar, as it gives treats their sweet taste and also affects more functional aspects, such as product texture and shelf life. However, sugar is also an ingredient that should be consumed in moderation as part of a balanced diet and active lifestyle. Mars buys and utilises sugar in production, which means that - in contrast to many market participants in the global market - the company is a natural “short”.

The hedging approach used is based predominantly on the fundamentals of the market. But it is a poor carpenter who only has a hammer in her toolbox. Fundamentals and technical analysis can both give insights into commodity markets. I can eat sugar with either hand... I’m ambi-dextrose…

Traders like volatility as this gives them opportunity; end users do not.

As you can see from Figure 2, sugar futures have historically traded like a rollercoaster. End-users prefer long term price stability to minimise risk looking out years so that the cost of, for example, a Mars Bar is not deviating on a day-to-day basis. On the other side of the aisle are traders and funds, who prefer to capture opportunities on a much shorter time span, right down to the minutiae of intra-day. Due to the differences in timing, this is not necessarily a zero-sum game. Funds can also utilise leverage to really swing the market around in the short term.

Figure 3 shows the Commitment of Traders report from the CFTC (which shows who is participating in the market) versus the #11 ICE futures price - (the world benchmark contract for raw sugar trading).

End-users would be classified under the “producer / merchant / processor / user” heading. The chart shows the “Net Fast Fund” position (a term for speculators) in number of contracts versus #11 Sugar (USc/lb). As can be seen, these tend to move together, though it is difficult to determine which is driving which; correlation does not imply one-way causation.

The #11 (Raw) Sugar futures have traded in New York in one guise or another since 1914, outlasting the exchanges they have traded on. Options on #11 were introduced in 1982. Futures and options on futures are used to price and hedge transactions by both hedgers and speculators.

As every ‘techie’ knows it’s always important to remember that “the trend is your friend”

Keep in mind that while many banks and speculators want to see higher prices, end-users desire low prices. Lower prices = lower ingredient costs to make delicious treats! In the price Figure 4, the #11 sugar price has broken below channel breakout, leaving us hoping that the Fibonacci retracement might be tested.

However, the Ichimoku chart, Figure 5, shows that sugar futures were already testing the cloud area. leaving us hoping that the Fibonacci retracement might be tested.

The other sugar futures benchmark of note is the #5 contract (or London sugar), which is used for hedging white refined sugar. As with its American cousin, the #5 market is highly liquid and used for hedging by sugar millers, refiner, and end-users (manufacturers) as well as by managed funds and both institutional and short-term investors.

As with #11, a rising #5 fund position tends to be associated with a rising market (Figure 6).

The long term (monthly, 20-year continuation) chart shows that the #5 has stalled at an interesting place from a technical perspective at a key retracement level (38.2% of the decline from the 2011 peak) and Fibonacci fan (Figure 7 ).

But the trend has been up.

Focussing in on the shorter term chart (two-year perspective, Figure 8), the market has been unable to post new highs but is also struggling to crack trendline support.

In addition, the 20-day and 60-day moving averages (one and three months respectively) have not seen a bearish crossover. Bears would like to see an extension lower towards the 38.2% and perhaps the 50% retracement of the upswing from May2020 - but no joy as yet. The Ichimoku chart (Figure 9) showed a bit more ‘space’ than the #11 chart to correct towards/into the cloud.

The difference between the #5 and #11 sugar markets is called the “Whites premium”. This is always positive as some margin is required to convert raw sugar to refined. But when the premium is at the low end of the range there is less incentive for refiners to buy raw sugar and convert it. When the premium is high, there is more of an incentive. The premium can be volatile due to capacity, global supply and demand for white sugar and stock levels (Figure 10).

Correlations with other markets?

The most cited correlation is with the crude oil market, given the relationship between sugar and ethanol (Figure 11). Historically there has been some logic to this. Sugar cane is the most efficient converter of sunlight into plant carbohydrates, eight times better than corn. This makes it the most efficient feedstock for ethanol. In Brazil in particular, the largest exporter of sugar, millers have the choice to produce sugar or ethanol, which is blended with gasoline for use in cars. When oil prices are high, Brazilian gasoline tends to be high increasing the profitability of ethanol over sugar. However, 2022 was an election year and there was been a substantial amount of political intervention to contain domestic inflation, which meant ethanol and gasoline prices were artificially capped. In 2022, sugar was not an energy play (Figure 12)!

Currency impacts are also important; a strong USD vs the Brazilian Real (BRL) helps Brazilian exporters, as they receive more domestic currency (Figure 13). This also helps the US which is a net importer of sugar.

Currencies also respond well to technical analysis.

USD/BRL has been largely range-bound through 2020-2022, with key support in the 4.95 zone to watch (Figure 14).

These are some of the factors that we incorporate into our research process supporting the buying team. Technical analysis is one of many useful inputs into our decision-making with a view to hitting that ‘sweet spot’ for sugar hedging.