Chart of the Week: Sugar’s Textbook Downtrend

With metals, energies, stock indices, and grains representing the majority of the trading in the futures space, sometimes the Soft markets get, well…  ignored. Our last look at the softs markets was when sugar was showing a certain mountain type shape, not knowing where it would go from there.

But since then, Sugar has continued its slope, down 24% since October with 50 out of the past 70 days down, and now at its lowest point since 2010 (although up a little today) {disclaimer: past performance is not necessarily indicative of future results}.

Sugar(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Source:

The reasons for the down move aren’t that people are no longer asking for sugar in their coffee or switching to Splenda (what happened to the War on Sugar), but that the big three sugar producers: Brazil, Thailand, and India are expected to outpace demand by 4.7 metric tons come September. That’s led to a lot of people piling in on the short side of this trade, as evidenced by the CFTC commitment of traders data via the Wall Street Journal.

“Money managers have been increasing their bets that raw-sugar prices would continue to fall. In the week ended Jan. 21, those bets outweighed wagers that prices would rise by the largest margin since July, according to the latest data from the Commodity Futures Trading Commission.”

But is there more than just supply and demand at work here? After all, back in October, one of Brazil’s largest sugar companies lost 180,000 tons of sugar in a fire (10% of Brazil’s export in a month), and the markets didn’t even flinch. So, how is it that a majority of traders in the sugar market are short positions? Yes, 4.7 tons is quite a bit more sugar than expected, but is there another factor at play?

Well, it just so happens that Brazil produces 25% of global production and 50 percent of world exports, and their economy (currency) is in a bit of a tight spot, after the fed’s decision to taper.

“Weakening currencies in Brazil and other large sugar producers also are expected to encourage exports, which could add to already robust supplies, said Michael McDougall, a senior vice president at brokerage Newedge.

When currencies in sugar-exporting countries weaken against the U.S. dollar, producers there often choose to export their crop because they would receive more of their local currency back for product sold abroad in dollars.”

A quick peek at the MSCI Emerging markets currency index shows a pretty similar down trend to Sugar, making the Sugar trade a sort of synthetic emerging markets short trade for all those who were complaining their managers weren’t short the Turkish Lira or Argentine Peso (those are so thinly traded, not many managers play in that space).

MSCI Emerging Currency Index(Disclaimer: past performance is not necessarily indicative of future results)
Source: MSCI

So, combine a lot of global supply with Brazilian Sugar farmers more willing to sell their Sugar for Dollars than their falling currency, and you have a classic down trend of your hands. Whatever the reason, it’s just the sort of trend most managed futures programs like to identify and ride out as long as they can.  And many futures traders and CTA’s alike have caught on: including Covenant Aggressive, Brandywine Symphony, Sona Trading, Auctos Global Diversified, Integrated Managed Futures, and Clarke Worldwide.

How do they do it?  Magic? Nope. Boots on the ground in Brazil analyzing the crop? No sir. They do it by tracking markets like sugar and entering into a short trade when the market breaks below its 20 day low, 200 day moving average, lower Bollinger band, and so forth. They do it by being wrong a lot when the market has a false breakout, in order to be right when the market keeps going that direction.

The Trend Nobody’s Talking About

Ok, well… not nobody, the WSJ’s MoneyBeat blog had a recent piece saying:  “Welcome to the Coffee Bust”. But for trend followers who keep their eyes peeled for the next trend that’s going to take hold, we’re wondering why so few managers have caught on to the multi-year decline in a commodity the entire world needs to function in the morning… Coffee:

Chart courtesy Disclaimer: past performance is not necessarily indicative of future results.

Since its peak in 2011, coffee has dropped more than 50% percent, yet we’ve been hard pressed (pun intended) to find many trend followers who have participated. Coffee may not be the most heavily traded market, but after 2 years of decline you’d think some of them would have jumped on this trade. Some other trends have started and finished three or four times in the time this downward slope has been happening.

One CTA who has participated in the short Coffee trade is Integrated Managed Futures Corp. According to IMFC Chief Investment Officer, Roland Austrup:

“We’ve been short CSCE Arabica coffee since October 2011, and we started building a short in Liffe Robusta in early April of this year… The Coffee trade (CSCE in particular) represents a textbook trade for  a long-term trend-based strategy. Coffee was very expensive in 2011 under several definitions – nominal or real price history, price relative to cost of production. Prices started braking down, any backwardation that was in place disappeared and the futures curve eventually went into contango. These are all ingredients for a potential secular long-term bear trend. And, as it turns out, the market went into surplus, one which continues to expand at present. When prices are high for a commodity and it goes into surplus, there is only one outcome … a secular bear market.

As for why so few other managers have picked up on this trend. Mr. Austrup had a few ideas:

“Coffee is a commodity that tends to exhibit very long term secular moves (including long trendless periods), but a lot of noise and gaps under shorter-term timeframes within the long-term trend. As such, I suppose it is not a market that is likely to be successfully traded under short-term time horizons. It is far too random and erratic in the short term.”

And of course the question we’re left with… if the price of coffee beans has fallen by more than half, why does my Starbucks still cost the same?  Then again, they’re getting away with selling people coffee for $7 a cup now, so maybe they’ve just figured out that when it comes to the morning joe, people just aren’t that price sensitive.

Finally – for the nearly $90 million invested in the cleverly named Coffee ETF “JO” who have lost -67% over the same period –  a read of our recent commodity ETF takedown may be just what the doctor ordered to kick that caffeine habit.

Ignoring the Biggest CTA Trade in Years

Several news organizations couldn’t help but fall all over themselves this week talking about how George Soros made a billion in the Yen and other U.S. Funds Scored Big in the Yen. We hope this isn’t the contrarian indicator that kills the trade, as the Yen is on a historic slide – new Prime Minister Shinzo Abe has been following through on his initial efforts to devalue Japan’s currency. Not even the hullaballoo over the G7’s criticism earlier this week was able to elicit more than a temporary hiccup in the trend:

Disclaimer: past performance is not necessarily indicative of future results.

With a big move like this, there are always going to be plenty of people making money (and many who are losing money). But when the press started pointing out the big winners this week, we couldn’t help but notice a glaring omission: no mention of CTAs. We know that quite a few CTAs have made (or are currently making) money on short Yen trades, including Covenant Capital Management Aggressive, Briarwood Capital Management Diversified, Mark J. Walsh & Co. Standard, and Integrated Managed Futures Corp. Global Concentrated. (Disclaimer: past performance is not necessarily indicative of future results).

One of the best trades for managed futures in years, and not even a mention in mainstream coverage about it? Well, Bridgewater gets a mention toward the end of the WSJ article, but no one seems able to decide whether they’re a hedge fund or a CTA (for our money, they’re the former, though BarclayHedge counts them as a CTA). Just another day in our industry, and a reminder of why the lack of hedge fund/CTA distinction in the media rubs us the wrong way.

The MFA Arrives

The Managed Funds Association’s Forum 2012 conference is well underway here in Chicago, and we love the chance to learn what some of our favorite CTAs are up to, as well as learning more about emerging managers. With so many managers in town, it’s not unusual to bump into them around town, such as our encounter with Troy Buckner of NuWave ($880m AUM) after dinner last night. We learned that he’s a rollerblader and a skier, but we couldn’t help talking shop, as well. Buckner explained to us that he believes large CTAs have benefitted from a tailwind in form of falling interest rates, and are likely to struggle (but not blow up) in a different environment. When and whether we reach that environment, we just have to wait and see.

We’ve also had a chance for some good conversations with other managers, as well, such as Roland Austrup of Integrated Managed Futures ($27m AUM), who continues to impress us with the program’s research and development. They are always hard at work new ideas to potentially improve the program, and are focused on having the best risk management possible. Their team of researchers at the University of Waterloo gives them a leg up in the research department when compared to other emerging managers. The global concentrated program, which was their big research effort back in 2008 and 2009, recently reached the 3-year track record mark in March.  Designed specifically for high net worth investors, this program continues to be an excellent lower volatility multi-strategy program, and one we recommend investors consider for their portfolios (on Attain’s Recommended list).

We also had a chance to sit down with Doug Bry of Northfield Trading ($274m AUM) and learn about his unique path to becoming a CTA. In a previous life, he was a criminal defense attorney for 10 years. His next venture, Northfield, was originally launched as a software development company before evolving into a CTA in 1989. The program is at new all time highs for many of their individual accounts, while the composite just below the high water mark. Bry also talked with us about his experience as NFA director, and had good things to say about the work that the new set of directors is doing on the MF Global debacle.

Things are just warming up, and we have plans to talk with as many managers as the MFA schedule will allow. Stay tuned.

Aim for the Bottom, Race to the Top?

Ouch- rough day to be in a long-only commodities fund yesterday, wasn’t it? While commodities across the board were mostly down (including Silver’s ugly 6.64% plunge), the Grains sector took the most consistent beating. It was one week ago today that we crowned Cocoa the winner in the race to new 2011 lows after the nosedive taken by most in early October, and, apparently, Grains got jealous, because Soybean Meal, Rough Rice, Wheat, and Oats all dipped below their respective lows for the close yesterday, along with a tagalong from Softs- Sugar. Congrats, guys. Welcome to the losers circle.

Source: Finviz; Disclaimer: Past performance is not necessarily indicative of future results.

Not in the losers circle were several of the managers we track, with Covenant Capital, Global Ag, Integrated Managed Futures Concentrated, and James River Navigator short Wheat, and Clarke Capital Worldwide short Soybean Meal. We said at the beginning of the year that we thought managed futures gains in 2011 would come from shorting commodities, and while a handful of managers does not a trend make, and while acknowledging that there are still plenty of managers out there who haven’t been able to shake October’s sting… here’s cautious optimism that we were right.