Hedge funds that bet big on a sugar rally are being rewarded with the commodity’s biggest advance since 2013 amid a looming global shortage of the sweetener.
Money managers have more than tripled their bullish wagers in just two weeks, increasing their net-long position to the highest in more than a year. A strengthening El Nino weather pattern is posing a threat to output in Australia just as production declines from mills in India to Brazil, the world’s top grower and exporter.
Prices have jumped 11 per cent this month, the most among the 22 components of the Bloomberg Commodity Index, a measure of returns.
The International Sugar Organization predicts that after five years of surplus, demand will outstrip production in the season that started this month. The deficit will more than double to 6.2 million tonnes the next year, the group said in September.
“Much of this move has come on the back of a tightening market,” said Harish Sundaresh, a portfolio manager and commodities analyst in Boston for the Loomis Sayles Alpha Strategies team. “There seems to be weather problems in Brazil, in certain parts of the country’s centre-south region, and India is also worried about the monsoon effect on crops.”
Sugar futures in New York climbed 16 per cent over the past three months, the biggest such gain since 2013. Prices are rebounding after reaching a seven-year low in August, spurred by declines for Brazil’s real that encourage exporters to increase shipments that fetch dollars in return. Since then, declines for the South American currency have eased, while dry weather is posing risks to the nation’s crop.
Ole Hansen, the head of commodity strategy at Saxo Bank, said that momentum remains positive and it could potentially carry it as high as 15 cents a pound. but warned that “in the short term, however, the sweetener remains vulnerable after speculators turned into very aggressive buyers during the past few weeks. Any signs of weakness could trigger some aggressive profit taking, especially if it fails to hold above 13.70 cents per pound”.
Mr Hansen said: “My outlook for sugar is generally positive but given the above potential, buyers should sit on their hands for now and wait for a better buying opportunity.”
Warren Kreyzig, a commodities research analyst at Julius Baer said that the bank maintains a positive outlook for sugar prices as the market slowly rebalances from half a decade of production surpluses towards a supply deficit.
“We currently expect price to rise to 14.5 cents per pound over the next three months,” said Mr Kreyzig.
Money managers boosted their net-long position by 33 per cent to 117,090 futures and options contracts in the week ended October 13, data from the US Commodity Futures Trading Commission show. That is the highest since July last year. Short holdings have declined in seven of the past eight weeks.
In Brazil, after too much rain disrupted gathering in the early part of the season, dry conditions are now threatening next year’s harvest, which could worsen the global deficit. At the same time, cane collected this year has had reduced sucrose content, spurring mills to turn more of the crop into ethanol, rather than sweetener. Only about 42 per cent of the crop this season has been processed into sugar, down from 44 per cent this time last year, industry data show.
On September 28, the Indian Sugar Mills Association the nation’s production will drop 4.6 per cent to 27 million tonnes in the 12 months started on October 1. A stronger El Nino would probably bring a lack of rain to the country and further decrease output.
China’s production could drop to the lowest in decade, while dryness will also cut supplies in Central American nations and South Africa, according to Tom McNeill, the director of Brisbane, Australia-based Green Pool Commodity Specialists.
This rally “is sustainable because it reflects the new fundamentals”, said Artur Manoel Passos, an economist and commodity analyst with Itau Unibanco Holding in Sao Paulo.
“The market has changed since September, basically because we and most analysts are changing the expectation for supply. Brazilian capacity to switch from ethanol to sugar is lower because there is not much more cane to be harvested this year. The real won’t be a factor, so important for prices at least until next year’s harvest.”
Bigger crops in previous seasons mean that global stockpiles are still plentiful. In India, the second-biggest grower, the government last month ordered mills to compulsorily ship sugar in a bid to trim inventories and boost local prices.
Exports can increase from other growers. While the Brazilian real has rebounded 11 per cent from a record low against the dollar reached on September 24, political turmoil and a slumping economy could spur further weakness to the currency.
On October 15, Fitch Ratings downgraded the country’s debt to the cusp of junk. A weak currency cuts production costs for growers and boosts incentives to sell commodities priced in the greenback.
Too much ethanol could also send prices for the fuel lower, encouraging more sugar production.
“The fundamental side is really strong, particularly if we start to see the dryness developing in India,” said Lara Magnusen, a California-based portfolio manager at Altegris Investments. However, she cautioned that the real correlation had dissipated, but had not gone away entirely. “And you could have government intervention and mandatory exports and that could always throw a wrench in any commodity market.”
* with additional reporting by The National