by Mario Maselli

Sugar has been struggling recently along with most other commodities, but I think the longer-term outlook is looking sweeter. The risk-reward profile looks favorable for investors looking to take bullish positions.

Looking at a monthly nearby sugar chart going back to the early 1970s, you can see how this market has made some significant peaks. Sugar traded as high as 66.5 cents per pound in 1974, and traded just above 45 cents in 1981. In the past two years, sugar’s peak stands near 31 cents. I believe sugar will likely surpass some of these previous highs, although in the short-term, the market is likely to struggle with deflationary trends impacting commodities overall.

Brazil is the largest sugar producer in the world, using sugar for fuel in the form of ethanol as well as for human consumption. As an alternative energy source, sugar is impacted by the price of oil. So as long as oil prices stay strong, it should support sugar. When sugar prices are low, Brazil diverts more of the crop to ethanol production, and when sugar prices are high, it diverts more to export markets. Right now, there isn’t a lot of momentum for alternative energy sources globally, but policy changes favoring more biofuels could have a big impact on sugar prices.

The supply picture right now is somewhat mixed. Thailand, the world’s second-largest exporter of sugar, has experienced tight domestic supplies, and is looking to import 100,000 tones of sugar. It is the first time in history the country will be importing more than it is producing. Rain and flooding has damaged its sugar crop, and according to the Office of the Cane and Sugar Board, output could fall 13 percent in the next crop year.

India, the world’s largest sugar consumer, is expected to see increased production, according to government officials. The production forecast is seen at about 23 million metric tons in the year starting October 1, 2010, up 22 percent from an estimated 18.8 million this season.

It’s also important to watch the economic situation in China. China has seen a strong and growing economy and has built a solid middle class, which tends to gain a sweet tooth. If demand ramps up just a small amount, it can have a huge impact on sugar prices. The combination of food demand and energy demand should drive sugar higher. There’s no question in my mind we’ll see higher sugar prices ahead.

In the past decade, sugar has traded in an average range of about 8 – 15 cents (with the exception of 2009′s spike). Sugar has maintained its base even with dramatic declines in other commodities taking place recently. For traders, I think bullish positions offer a good risk-reward profile. The downside is likely to be capped at 2-3c, but the upside potential is quite large.

Please feel free to contact me with any questions you might have about the markets, and to develop a specific trading strategy based on your unique goals and risk tolerance.

Mario Maselli is a Senior Market Strategist based in Montreal with Lind-Waldock. He is accepting new clients from Canada and can be reached at 514-866-1858 or via email at mmaselli@lind-waldock.com.

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