Sugar price is hovering around the previously steady support zone of 18 cents per pound. The sugar #11 futures, the global benchmark for raw sugar trading, has been on a decline since mid-May after bulls lacked enough momentum to sustain the rebound past the resistance level of 20 cents. Since then, the commodity has dropped by over 10% to trade at its lowest level since the beginning of March. As at the time of writing, it was at 17.93; down by 0.77%.
Fundamentals
Weakening in the value of the Brazilian real is one of the aspects behind the plunge in sugar price. Notably, the emerging market currency has a direct correlation with commodity’s price.
As the US dollar rallies to its highest level since December 2002, BRLUSD is trading at its lowest level since late-January 2022. As at the time of writing, the latter currency pair was at $0.1849; down by over 13% since late May.
Brazil is the leading producer and exporter of sugarcane globally; supplying about 50% of the world’s produce. Similar to other commodities, sugar is priced in US dollars. At the same time, production costs are in Brazilian real. As is currently the case, a decline in the value of the real lowers production costs while reducing the amount of dollars that the commodity fetches in the market.
The easing in the rally of crude oil price has also contributed to the bearish sugar price outlook. Ethanol demand has a direct correlation with crude oil price based on its status as an alternative fuel. As at the time of writing, Brent futures had plunged to its lowest level since mid-May at $102.02. At the same time, the benchmark for US oil – WTI futures – were at $98.26. The latter has dropped below the psychological level of $100 per barrel for the first time since 11th May.
Just as corn is the main source of ethanol in the US, Brazil usually uses sugarcane to produce the alternative fuel. Indeed, it is the second-largest producer of ethanol after the US.
Sugar price technical analysis
Sugar price has dropped below the pivotal level of 18 cents for the first time in about four months. As shown on a daily chart, it is trading below the 25 and 50-day exponential moving averages. Besides, it is at the periphery of the oversold territory with an RSI of 30.
Based on these technical indicators, coupled by the fundamentals, I expect it to remain under pressure in the short term. In particular, the support zone at 17.84 is worth watching in the immediate term. With a further decline, sugar price may drop to its lowest level since late February at 17.57.
On the flip side, a corrective rebound may have it find resistance at 18.33. Even so, I expect it to remain below the crucial support-turn-resistance zone of 18.50.
