The story behind the best gains in commodities this year isn’t just about supply and demand.
Hedge funds have amassed the biggest ever bullish position in sugar, helping send prices up 55 percent this year, more than any other contract in the Bloomberg Commodity Index. Now, traders are wondering when speculators will sell and how quickly prices could fall.
Sugar traders at industry events across London this week compared the situation to early 2010, when funds sales caused prices to fall from 30 cents to 13 cents a pound within six months. The selloff will be sparked by a “macro issue” rather than an event in the sugar market, and may happen before March, Howard Jenkins, head of sugar at ADM Investor Services International, the brokerage owned by Archer-Daniels-Midland Co., said Wednesday at the company’s event in London.
Raw sugar futures for March slid 3.4 percent, the biggest intraday drop in a month, to 22.99 cents a pound as of 9:18 a.m. in New York.
“The rush to exit could be similar to 2009-10,” said Jonathan Drake, chief operating officer of RCMA Commodities Asia Pte. and former head of sugar at Cargill Inc. “The key point is we have no idea when, most likely in 2017.”
Funds have piled into sugar as the broad recovery in commodity prices enticed more investment. Inflows into raw materials totaled $54 billion in 2016, on track for a record, Barclays Plc said in a Sept. 15 report.
At the same time, poor growing conditions are threatening crop yields in Brazil and India, the biggest growers. Traders from Czarnikow Group Ltd. to Sucres et Denrees SA and analysts including Kingsman and Green Pool Commodity Specialists forecast a second year of shortages for the season that started this month.
Speculators’ bullish bets on sugar were about 348,000 futures and options in the week to Sept. 27, 64 percent higher than at the end of 2015, according to data from the Commodity Futures and Trading Commission that excludes index funds. That equates to almost 18 million metric tons of sugar, more than the European Union produces in a year.
Another Big Bear
“Funds are very long, that’s another big bear in the market,” Claudiu Covrig, a senior analyst at Kingsman, a unit of S&P Global Platts, said during a presentation in London on Tuesday. “When they will liquidate that’s a big question, but for sure they will liquidate when other commodities or equities go, or interest rates increase in the U.S.”
The timing of the fund pullback is anyone’s guess. It’s possible the position could increase to 400,000 contracts and prices may climb to as high as 26 cents a pound, Covrig said.
Funds have created “artificial demand” for sugar, according to Ivan Melo, a commercial director at Raizen Energia SA, Brazil’s largest sugar and ethanol producer. While prices could return to a fair value of 18 cents a pound if speculators sold their position, a 24 percent drop from current levels, they won’t fall back to 12 cents, he said in an interview in Sao Paulo on Friday. Shortages in the sugar market will probably last three season before production rebounds.
Other analysts cited the booking of profits at the end of the year and better sugar production next season as the catalyst for hedge funds to sell.
Good monsoon rains in Asia this year could boost production next season in India and Thailand, both major growers. The EU may also boost output after the end of quotas that limit production and World Trade Organization restrictions on shipments, according to Jenkins of ADMISI.
The sugar market will probably move into a small surplus of 1.2 million tons in 2017-18 after shortages of 6.5 to 7.5 million tons this season, he said.
“Traders aren’t expecting prices to maintain their current levels for more than then next 9 months or so,” Jenkins said. “If the deficit is to going to have a further impact on the price, it should happen before the next Brazilian center south crop,” which usually starts at about April.