Funds Sour on Sugar as Brazil Outlook Eclipses Global Deficit

(Bloomberg) – Investors are losing their taste for sugar.

Money managers are backpedaling on bets prices will rally, cutting their wagers last week for the first time since February. Favorable weather is accelerating the harvest in Brazil, the world’s biggest producer and exporter. That’s easing concerns over supplies as drought threatens plants in other parts of the world.

Raw-sugar futures have tumbled 11 percent since touching a 17-month high in late March. Since then, a weaker real has encouraged growers in Brazil to increase shipments abroad that fetch dollars in return. At the same time, declines in the country’s ethanol price mean that mills have more incentive to turn cane crops into sweetener, rather than into the biofuel.

“The currency is a big, big part” of the slump in sugar prices, said Lara Magnusen, a La Jolla, California-based portfolio manager at Altegris Advisors, which manages $2.44 billion. “If you put a lot of money in sugar when it was on the rise, it’s not a bad time to take a pause, particularly with the volatility in the real.”

Holdings Drop

Hedge funds and other large speculators reduced their net-long holdings in raw sugar by 7.2 percent to 151,485 U.S. futures and options in the week ended April 5, Commodity Futures Trading Commission data showed three days later. Short wagers jumped by 29 percent, the most since Feb. 2.

Raw-sugar futures fell 2 percent last week to 14.88 cents a pound on ICE Futures U.S. in New York. It was the third straight weekly decline.

Brazil’s harvesting season kicked off on April 1, and some processors started collecting crops earlier to take advantage of higher domestic sugar prices. The early gathering means that cane processing in the Center-South region, the main growing area, probably more than doubled in the second half of March from a year earlier, according to five estimates from analysts, millers and brokers surveyed by Bloomberg. Industry group Unica is expected to release official estimates in the coming days.

The real slumped 15 percent against the dollar over the past year. Political and financial turmoil has rocked the country, and farmers have been selling as much sugar as they can to take advantage of the currency declines.

Weather Threats

Even with shipments flowing from Brazil, some analysts are still expecting a supply shortfall for this season. The strongest El Nino in two decades curbed output in China, India and Thailand amid dry weather. Last week, Ratzeburg, Germany-based researcher F. O. Licht tripled its forecast for a deficit for the 2016-17 season to 4.9 million metric tons. Still, that’s down from the 8-million-ton shortage seen for the previous season, the group estimates.

Adding to production concerns is the possibility of the shift to a La Nina weather pattern this year, which could bring drier-than-normal conditions to parts of Sao Paulo and hinder next season’s output, said Artur Manoel Passos, an economist and commodity analyst at Itau Unibanco Holding SA in Sao Paulo. He was the most-accurate forecaster for sugar prices in the first quarter, according to data compiled by Bloomberg.

Even with the weather threats, “unless we see some shock in the market, prices won’t go to the levels seen in late March,” Passos said in a telephone interview. “The funds were too long, and now they are adjusting a bit.”