Analysis: Big speculative bet on raw sugar seen spurring production

NEW YORK (Reuters) - A huge bullish position held by hedge funds and money managers in raw sugar futures in New York is convincing global producers to boost production, a move analysts say could produce a glut before long due to persistently weak demand.

FILE PHOTO: A truck is loaded with sugar at the Coopevictoria sugar mill in Grecia, Costa Rica January 25, 2019. REUTERS/Juan Carlos Ulate

Speculators hold a long position of roughly 200,000 contracts on ICE Futures, the highest since 2016. The high prices are expected to stimulate output in countries including top producer Brazil, which could put out another record crop of 38 million tonnes.

However, analysts say the speculative bets from funds do not line up with market fundamentals in sugar, which is moving from a supply deficit in 2019-20 to a surplus in 2020-21 due mainly to rising production in Brazil and India.

Should output continue to increase, it threatens a glut that could sink prices.

“I think funds are pushing prices higher in an artificial manner,” said Arnaldo Correa, director at Archer Consulting in Sao Paulo.

S&P Global Platts recently cut its sugar demand projection by a combined 4.5 million tonnes for 2019-20 and 2020-21 due to the pandemic, lowering overall expected demand for 2020-21 to 183.5 million tonnes.

Fund buying drove sugar prices to the highest level in eight months this week, and closed at 14.85 cents per pound on Wednesday. The upward move has attracted a flurry of hedging from producers in Australia, Central America and, particularly, Brazil. SBc1


Archer, who provides hedging advisory services to Brazilian mills, estimates that sugar companies in the country hedged more than 8 million tonnes of sugar from the 2021 crop that will only start to be harvested around March, or nearly a third of total expected output.

Producers use hedges to lock in profits on crops they harvest in future.

There are some factors driving the bullishness. There is concern that Brazil’s crop could be smaller than expected due to below-average rains this year. In India, the government’s has not laid out its plans for subsidies for producer exports.

In addition, the dollar has weakened, which tends to boost the prices of dollar-denominated commodities.

Analysts say funds may liquidate positions if India confirms expectations to subsidize around 5 million tonnes of exports, which will add more supply. With sugar prices up 60% from a low of 9.05 cents in April in the peak of coronavirus-related measures, broker Marex Spectrum sees the potential for a large selloff once India’s policy is clear.

Some sector specialists noted that four years ago funds built a long position of nearly 340,000 contracts, pushing prices to almost 24 cents per pound. Once they started selling, sugar dropped by 25% between October and December.

“In 2016, we had a similar situation, with funds pushing prices higher,” said Claudiu Covrig, sugar analyst for S&P Global Platts. “Until the market collapsed.”

Reporting by Marcelo Teixeira; Editing by David Holmes