Booming sugar market at risk of fund sell-off, Rabobank warns

June 9th, 2016


Category: Sugar

Sugar-Cubes450x299(AgriMoney) – Heavy fund activity has left sugar markets vulnerable to a sudden sell-off, even as fundamentals turn more supportive, Rabobank warned.

The bank suggested that “market sentiment has moved way ahead of the fundamentals,” despite increasing its expectation of next season’s sugar deficit, the extent to which supply will outpace demand.

A shift in production could encourage a “rush for the exit” of a heavily bought market, the bank said.

In two months, front month sugar futures in New York have climbed some 41%, from barely over 14 cents a pound, to the current session’s high of 19.74 cents a pound, their highest level since 2013.

“With the current sentiment, the market is one shock away from breaking through the 20 cents a pound level,” Rabobank said.

Supportive fundamentals

“Fundamentals have certainly provided considerable support for price developments,” Rabobank said.

Rabobank increased its forecast for the global sugar deficit, the extent to which demand will outstrip supply, to 8.5m tonnes in the year to September 2016.

And the bank’s preliminary forecast for 2016-17 has another deficit, of some 5.5m tonnes.

Recent industry forecasts for the 2015-16 deficit have ranged between to 4.0m tonnes forecast by Olam, to a forecast of 9.3m tonnes, from INTL FC Stone.

Forecasts for the 2016-17 deficit have ranged between 3.8m tonnes, issued by the International Sugar Organisation, to the 7.8m tonnes forecast by INTL FC Stone.

Asian production dissapoints

“The tail-end of major Asian region harvests was generally weaker than expected, prompting further downward revisions to 2015-16 production estimates for major players such as India, Thailand and China,” Rabobank said.

And Asian production is expected to fall even further in 2016-17, as demand rises.

Rabobank also downgraded 2015-16 EU production prospects, with output expected to fall even further in the following season, despite the scrapping of production quotas by the end of 2017.

Brazilian disruption

And Brazil, the world’s top producer, there has been short term pressure from rains.

Brazilian production is expected to rise sharply this year, thanks to high prices in local currency terms, and a shortfall in production last season.

But as weather turns wetter and cooler, production is believed to have slowed, with flooding causing delays in exports.

The bank noted that in addition to weather concerns, there were ideas that export capacity could be squeezed by a heavy flow of grain exports through roads, rail, and ports.

But Rabobank warned that estimates for 2016-17 were very preliminary: with only a 3% upgrade to production prospects, the deficit would disappear, and a 3% drop in output would double it.

Centre-South Brazil´s 2016-17 harvest still has six months or more to run; the Indian, Thai and Chinese 2016-17 harvests will only begin towards the end of this year, the bank warned.

Price rises higher than justified

And despite bullish fundamentals, Rabobank said the recent prices were higher than were “justified” according to their models, which point to a price of 18 cents a pound.

“Of course could be that our numbers and/or our model are simply wrong,” the bank said.

But it warned that “it could be that sentiment has moved way ahead of the fundamentals, either anticipating them or overshooting them”.

“It would hardly be the first time,” the bank said.

Funds buy big

A key factor in the rally has been fund buying.

In recent weeks funds have been steadily pushing their long positions in New York traded sugar to record levels, according to regulator data.

This has been supportive for prices, but also leaves the markets vulnerable to a sell-off.

“Many fund players must be delirious with the returns that sugar has generated over the last two months,” Rabobank said.

“But while these returns look good on paper, they remain vulnerable to the volatility of markets.”

The bank warned that the record fund net long position “makes the sugar market vulnerable to any kind of macroeconomic shock that could sour general sentiment with regard to commodities.”

If the macroeconomic picture shifts, Rabobank said, prices could fall amid a “general rush for the exit”.

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