Hackett Advisors in the News

Sugar: Get Ready to Short Producers, Go Long Buyers

Justin Rohrlich November 18, 2010 10:30AM|

       A classic top is forming, according to one expert. Here's how to play it..

Money manager Shawn Hackett, founder and president of Hackett Financial Advisors, a firm with a focus on agricultural commodities, is expecting a big move down in the sugar market over the next week or so.

“We recently saw a 20% fall-off in price over a very short period of time,” Hackett tells Minyanville. “After a big break like that, you almost always get a relief rally. That rally will, on average, recoup about 60% of the loss, and the next move down is usually the terminal drop.”

Hackett says that when he sees that 60% rebound, it’s his signal to get short.

“Right now, the bounce we’re seeing is totally expected, totally predictable” he explains. “Sugar went from about 33 ½ down to around 25 ½ -- an 8 cent drop. A 60% retracement of 8 cents is 4.80, 5 cents. So the 30 cent area would be 60% of prior decline.”

Hackett points out that the key to recognizing commodity market tops is an “overbalanced decline.”

“You’ll get brief corrections -- 5%, then a new high,” he says. “Another 5% correction, then another new high. Then you get a correction that’s overbalanced, a clear indication that the market is putting in a top. A relief rally from that overbalanced reaction is the ideal time for a lower-risk short. History is littered with that being a key sign. Commodities 101, really.”
The chain of events that got us here is quite interesting.

“In 2008-2009, India had two catastrophically bad crops, back to back,” Hackett says. “They’re one of top two sugar producers in the world, and have historically been an exporter. After those two crops, India became an importer, and available world supply dwindled. Then, the market lost half its value as a large Brazilian crop came online, but as that got used up, we were still in a tight situation. Adding to that, the commodity craze we’ve seen took things up even higher. But India and Brazil are expected to have record crops again, so we should be seeing an oversupply.”

Sugar is a unique crop, in that once the decision is made to plant, you’re committed for a longer period of time than usual.

“Everyone in the world has been getting rich on sugar recently, so they’re all planting new acreage,” Hackett says. “But when you plant sugar, you get a chance to harvest it four times, unlike, say, corn. Now, once you’ve planted and made that commitment, it stays with you for four years. That makes for a very, very bearish situation because anyone who’s growing it is going to be growing it for four years before they make a decision as to what to plant next.”

That’s why Hackett believes “we’re going to have a sugar surplus for the next several years.”

How to play it?

“Well, you could short producers like Cosan (CZZ), which could get severely hurt on a major sugar crash, unlike an Imperial Sugar (IPSU), which, as a processor, could benefit.” he says. “You could also take a look at the iPath Dow Jones-UBS Sugar Subindex Total Return ETN (SGG).”

On the buy side, “a nice contrarian play would be to get long candy companies like Tootsie Roll (TR), or Hershey (HSY). They could get a nice lift if we see the kind of knockdown in sugar prices I expect. Expanding margins by taking advantage of lower input costs would be very good for earnings.”


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