Weekly Sugar Wrap
Written by Howard Jenkins, Head of Global Commodities
The sugar market joined the fund’s buying party this week culminating in a near 90 point jump in prices yesterday. Last week finished with a mini-collapse as sell-stops were triggered into thin buying which saw prices drop over 50 points in a matter in minutes. These losses were slowly recouped earlier this week as the momentum seen since mid-December was maintained. However, yesterday saw heavy fund buying appear blasting prices through the previous 3 ½ years highs and well beyond. Somewhat shell-shocked traders and analysts are now trying to put some logic to the move. The funds have been heavy buyers of Agricultural commodities for several months as they see a commodity bull-cycle starting especially in grains and the soya complex where there are also justifiable fundamentals. They developed an appetite for sugar well before grains but then started to lose interest liquidation a sizable portion of the position. However, since Christmas, they have become increasing keen on sugar again culminating in prices rallying to their highest level since 19th April 2017. Their current net long position could well be close to 250k lots.
Most analysts are struggling to find reasons from a fundamental basis to justify the rally of nearly 150 points since the beginning of the year. Drops in production from major producers such as Thailand and the EU are against a record production in Brazil CS of a record 38.2 million tonnes a 44% increase year-on-year and the potential for India to produce well over 30 million tonnes of sugar during their on-going harvest. At current prices Indian exports see a very healthy margin thanks to their government’s export subsidy. Indeed, if prices continue to rally to over 17 cents, Indian exports will be able to export even without the help of a subsidy. Brazil’ next harvest starts in April and with ethanol parity well below current sugar prices mills will continue to concentrate on sugar production. The cane may have been impacted by earlier dry weather but it has been much wetter lately and some analysts are starting to pencil in 36-38 million tonnes for next season assuming crude prices don’t rocket making ethanol demand rise. On the demand side there is a view that before the next Brazilian CS harvest there is a tightness in physical supply. Indian exporters are busy plugging this gap.
There is, of course, a wider picture to consider on the demand side. Consumption took a hit last year due to the lock-downs across the world caused by the pandemic. With the on-going global lock-downs as new variants of the virus emerge it is unlikely any major recovery in consumption will be seen. Canny buyers such as the Chinese bought large quantities of sugar last year when prices slumped and are now unlikely to buy until well in the second quarter this year. Hopefully, the global pandemic will start to ease by the middle of this year as vaccine roll-outs gather pace. However, whether this sees consumption jump back to pre-pandemic levels remains to be seen but there is likely to be a lag.
For the time being the funds are in control as they are across many other commodities. Their ability to trade huge volumes and increase volatility will continue to make commercial traders wary especially as many have taken a conservative risk-on attitude since the beginning of the pandemic. In sugar they seem to be exploiting the lack of decent selling in the front month which has seen the Mch/May premium just shy of 100 points. There may be some pull back in prices but the large funds are likely to be in for the long-term especially as the chatter about a new bull cycle in commodities increases. They are likely to want to maintain their exposure to all food commodities regardless of the underlying fundamental picture.
Contact the ADMISI Sugar Desk team:
Howard Jenkins, Kevin Watkins, Steven Trigg
Phone: +44(0) 20 7716 8598
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