The market traded another very large volume day yesterday in NY, posting almost 420K lots including more heavy spread related trading. The flat prices, however, failed to make any further inroads to the upside and post new highs and the spreads posted their highs early in the session. It was in the latter part of the day that the markets took a tumble, led by what we believe was trade selling both on the outright and on the spread. March/May ended the day at 38 pts inverse having more than halved in value from the highs at one stage trading a low of 35 pts. By contrast, May/July only lost 5 points on the day by settlement off a low of 11 pts. The inability to make new highs, the overbought conditions and aggressive selling which in turn elected trailing sell stops behind recent longs were the main reason for the drop which we construe as more technical in nature and based on order flow. There was nothing fundamentally based to back the downward move, and we consider it a correction. The May up-trend channel with extremities currently at 14.60/15.50 remains inviolate.

In London, values also dropped, and attention was fixed on March, March/May spreads and the March whites premium. This last traded a high of $108.50 early in the session and by the close was valued at $90. March/May spreads traded from a high of $22 inverse to a low of just $5.00 before settling at $7.70. Volume on the spread was just over 3K lots however and not surprising considering March expires tonight. Open Interest on March has just been reported at 9,758 lots basis yesterday’s close (down 6,107), so delivery expectations are now below the 500K MT mark with very low activity so far this morning on the March contract.

The markets have recovered so far with slight gains on all months in NY. The March/May spread is hovering either side of 40 points, and we believe there is more action to come. Whilst everyone expects CS Brazil to increase sugar in its mix for the coming crop, it is still likely that ethanol will still be favoured early on. With the Thai harvest drawing to an expected early close and production well down, we expect trade flows in raws to remain tight until the Brazil harvest gets well underway. Producer pricing has been present all along but mainly in the forward months, benefitting from the generally weak BRL (off the recent highs but closing weak at 4.35). Energy prices are higher and seemed to have turned in the short term, and this also helps sugar if gasoline prices don’t get lowered further in Brazil, where parity has now been reached at 70% for hydrous ethanol at the pumps.

Tonight sees another Commitment of Traders report, and we will have an extra day to digest it given the President’s Day holiday in the US on Monday. It will exclude activity since Tuesday when the markets reached new highs so will be out of date. However, it will point to the continuing increase in both Commercial and Non-Commercial gross longs and in Commercial gross shorts (producers) given the weak BRL during the period. Basis Futures only, Open interest rose 52,411 in the period 5th to 11th and whilst March OI dropped by 86.8K lots on spread activity by all sectors, May and forward months to May 21 inclusive showed a combined increase of almost 133K lots. We would guess a net long of around 160K for the combined Non-Index Fund and non-reportable sector, expecting further increases in Index Fund and gross Commercial longs.

In conclusion, ahead of a long weekend and in the light of overbought conditions, a correction was to be expected, but we still believe the ingredients are there for the pot to be stirred and bubble up further. Sugar is currently ignoring macro fears, and we don’t know if this is right, but we prefer to follow the trend which still remains very much upwards. Basis May NY (now that March is about to go spot) support lies at 14.20, 14.53 and 14.50 with resistance at 14.96, 15.10 and 15.29 followed by 15.50 (the top of the trend channel). March options expiry is on Tuesday so values may reach options lock. The question will be: which strike, given OI on each of them.

Monday is President’s Day in the US and NY markets will be closed. London sugar will close one hour earlier than usual.

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