Blatant Government Market Manipulation!
Take a look at this…
As you can see in this long-term sugar price chart, the sweet commodity has been in a hefty downtrend since mid-2011. Ample global supplies have sent prices spiraling down to multi-year lows.
But look a little closer and you’ll find something interesting…
In this short-term chart, you’ll notice sugar prices are perking up in recent trading. In fact, the sweetener is currently trading at a 3-month high near 17.5 cent a pound.
And judging by technical analysis alone, the commodity looks ready for additional gains in coming weeks.
So it begs the question…
Is now a good time to get long the sugar market?
While the technical picture is certainly looking bullish, the fundamental reason for sugar’s recent advance is anything but.
Let me explain…
You see, the United States Department of Agriculture (USDA) recently purchased 7,118 short tons of beet sugar from a US producer for $3.6 million. Once bought, the USDA immediately sold the sweetener to a domestic ethanol plant for $900,000.
Read that again…
The USDA paid $3.6 million for sugar and then sold it at a loss of $2.7 million!
Isn’t it nice to know your tax dollars are being put to work so efficiently?
It makes my blood boil…
Why is the USDA throwing money down the drain?
Well, it’s a long and complicated story. Allow me to break it down as simply as possible.
In 2008, Congress passed the US Farm Bill. Part of the legislation requires the USDA to purchase sugar from US producers and immediately sell it to domestic ethanol producers. The program was put into place in case sugar prices dropped to levels that put domestic sugar farmers at risk.
As you can see from the long-term chart above, the price of sugar has tanked in recent years. Prices are so low that US sugar producers are at risk of defaulting on $298 million of USDA loans.
That’s why the government agency is stepping in, buying sugar at inflated prices and selling it a loss. The USDA is attempting to take excess supply off the domestic market, which in theory will drive sugar prices higher.
Once higher prices are achieved, it will allow US growers to sell their crop at a price which will ultimately allow them to repay their USDA loans.
Like I said, it’s a complicated mess…
I could go on for pages about the ill effects of the USDA’s plan.
But for our purposes, all you need to know is this…
…the recent rise in the price of sugar is solely due to government market intervention.
We may see the sweet commodity move higher in the near term, but rest assured this government induced market trickery will end badly for bullish sugar investors.
Until Next Time,
Justin Bennett
Category: Commodities
