Sugar: Get Ready to Short Producers,
Go Long Buyers
Justin Rohrlich November
18, 2010 10:30AM|
top is forming, according to one expert. Here's how
to play it..
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.
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.”
that when he sees that 60% rebound, it’s his signal
to get short.
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.”
out that the key to recognizing commodity market tops
is an “overbalanced decline.”
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.
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
a unique crop, in that once the decision is made to
plant, you’re committed for a longer period of time
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.”
Hackett believes “we’re going to have a sugar surplus
for the next several years.”
How to play
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
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