Magazine article Modern Trader

Is Sugar 'Cheap'?

Magazine article Modern Trader

Is Sugar 'Cheap'?

Article excerpt

Is sugar |cheap'?

Sugar prices are notoriously volatile -- from a high above 65 [cents] per lb. in 1974 to the 7 [cents] area in 1978 to above 45 [cents] in 1980 and then back down to only 2 [cents] in 1985.

But, as with most physical commodities, one thing that is consistent about sugar is its response to supply-demand fluctuations. What, then, is the "right" price for sugar under varying supply/demand conditions?

John Rende, president of California Securities Corp., an introducing broker and commodity trading advisor firm in Lakespur, Calif., uses the March futures contract price at the end of February, about the middle of the sugar crop year, to make his analysis of the sugar situation.

Prices at the end of February and percentage ending stocks for each crop year since 1974 are shown in the table, reflecting the general stocks vs. prices correlation you would expect. Prices tend to range within a band, Rende notes, the width of which tends to decrease as prices decline (low carryovers bring about speculative enthusiasm).

On a scatter diagram, Rende has placed three arbitrary lines, showing the high, low and median ranges of the band. For example, a carryover of 20% of usage would call for an expected low price around 9 [cents], a high price around 23 [cents] and an average price around 15 [cents] per lb.

Another way to see supply "tightness" is to relate this year's expected supply to last year's usage, expressing it as a percentage, Rende says. The same types of correlation show up.

U.S. Department of Agriculture (USDA) estimates for this crop year in the table see percentage ending stocks at 16.9% with supply as a percent of previous year's usage at 119. The scatter diagram suggests sugar prices at the end of February should have been between 12 [cents] and 30 [cents], with an average expectation of 20 [cents] per lb. …

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