The sugar decay

Shorting sugar really or metaphorically is possible and healthy.
My wife kept us off excess sugar. We stopped ‘juicing’ (drinking sweetened beverages) a few years back, stopped putting loads of sugar tea spoons in our regular cup of coffee or tea and learnt to share a chocolate bar in a week. Can you believe that? Well I could not till I leashed my urge for sweet things. Coming from Delhi, it was harder for me, it still is, I am trying. She also taught me the 80-20 principle of food. You have to control 80% of time what you eat and 20% of the time is when one can indulge with food. I have a confession. I indulged last night and almost elbowed an 8 year old digging into a large bowl of ice-cream.
The sugar urge economics
It’s so tough to control the sugar urge. There are multibillion dollar businesses built around this urge. No wonder the world calls it a sugar crisis and forecasts further upside. Raw sugar traded on New York’s Intercontinental Exchange surged nearing a 30 year high. Consumption habits have changed, the sugar crisis is total from Philippines, India, Pakistan to Brazil and Mexico. There is violence, protest and panic about tomorrow being the day of no sugar.
Government of India has been asked to urgently import 3-5 million tonnes of sugar. This also has been pegged as the toughest years for the beverage industry. Hedge funds could not have been far behind.  There is simply not enough sugar.  The cry is always at an extreme.
The performance cycle approach
This is what we said on 27 Aug 2007 on Sugar, “The soft has been falling internationally from the last seven quarters, but the negative news about sugar barons miseries, output glut only mark the sentiment landscape from the last two quarters, while prices internationally have been stagnating near $10. Negative news could not push prices lower. We continue to see this as a low risk entry point for sugar too along with coffee and cotton, all of which should see better prices ahead.”
We at Orpheus have a habit of looking at top losers and top gainers carefully, as real value occasionally lies with top losers while top winners are great reduce or short opportunities. Wheat was the top loser among the agro complex registering 27% losses in the last 12 months. Sugar on the other hand was the top gainer for the respective period. Long wheat, short sugar might look like a workable strategy. We will review long wheat – short sugar for entry later.
It is not just with sugar, we humans have an uncanny ability to cry at extremes. We said on 5 Feb 2007, “Killing the Cotton farmer – While Dow Jones Cotton Index is finishing a multi year and a multi decade bottom. We anticipate supports coming in on the intermediate time frame.” Nov 2008 cotton bottomed and has been rising since then. Cotton closed the year with the second largest gain in the agro complex at 34%.
Barring Coffee, which is still below 2007 prices, cocoa and sugar pushed up from Oct 2008 to Jan highs, up 140% and 90% respectively. We also mentioned about how equity play works contrary to cocoa and sugar. As equity markets came under stress the two softs took off. Wheat looks to be bottoming and we continue to look at entry levels on the grain.
How irrational?
There will always be inefficiency and irrationality. But can’t a rational mind ask, are we not always late in identifying the impending demand-supply gaps? How much does product feel, product knowledge, economics valuable in predictive knowledge?  Extrapolation is easy. But like Jeff Watson, blogger at Daily Speculations says, “There is nothing in the USDA (United States Department of Agriculture) 2010 crop report that will affect prices on the upside unless demand increases, country movement slows, or some type of crop disease infects the crop”. What one can add to this argument is “Show me three published reports talking about the sugar bull from 2008 lows?” How few were the bulls then and how few are the bears now.
Conclusion (Short Sugar, Long Corn)
Absolutely speaking the Sugar bull may have more to go before it surprises the staunchest of bulls. However, on relative performance cycles sugar is topping as an agro complex performer soon. This means relatively one can still profit by doing short sugar – long corn, short sugar – long wheat pairs.  The ongoing long sugar – short corn pair should reverse in polarity soon. Sugar like everything else is connected with time and as time decays, the sugar decay will follow.