Sugar futures extend rally to 10%. But can it last?

(Agrimoney) – Sugar futures jumped back up over 13.00 cents a pound, taking to 10% their rebound in five sessions, amid as weather concerns in Brazil spurred hedge funds to close some of their huge short position in the sweetener.

Sugar futures for May touched 13.13 cents a pound in New York, extending a rally from a six-year low of 11.91 cents a pound reached on Tuesday last week.

The rise was attributed largely to weather worries in Brazil, the top producing country, where undue dryness earlier in the year has been followed by wetness which – while boding well for yields – has threatened a slowdown in early harvesting of the crop in the key Centre South region.

‘Not enough weather risk’

“With the upcoming Centre South Brazil crop ready for harvest, it may be that not enough weather risk has been taken,” said Nick Penney, senior trader at Sucden Financial.

The potential for the first report, due next week, from industry group Unica on the progress of the Centre South 2015-16 harvest, which officially began on Wednesday “may paint a more constructive picture” for prices.

The International Sugar Organization said on Wednesday that “most mills are likely to hold off the start of the crushing season to allow crops more time to recover from the severe drought of 2014”.

And while “recent rains across the Centre South are likely to support cane development”, the ageing profile of the region’s crop, making it less productive, is “expected to counterweight the benefits” of the moisture in yield terms.

‘Stepped up demand’

Furthermore, low prices may be encouraging demand for raw sugar from refiners, by boosting margins, said Jack Scoville, commodity analyst and vice-president at US-based Price Futures group.

Mr Scoville said that it looked like “refiners have stepped up demand for raws, because they’re able to make money off it.”

While white sugar futures for May fell by 11.2% in the first three months of 2015, that represented an outperformance compared with the 17.8% fall in May raw sugar futures, implying expanded refining margins.

The rally in the real, which has recovered some 8% from a 12-year low against the dollar set on March 20, has boosted the value in greenback terms of Brazilian assets.

Short-covering wave

The rally is also seen being fuelled by short-covering by hedge funds which, as of last week, had a near-record net short position in New York sugar futures and options.

While betting on price falls has been hugely profitable for hedge funds over the past year, the extent of the short position has left sugar vulnerable to a spike in prices if speculators are prompted to cover these holdings.

However, not all observers remained upbeat over sugar price prospects, saying that the current rally was unlikely to develop into a sustained price recovery, given ample global inventories of the sweetener.

Mr Scoville said that, around the psychologically-important 13-cents-a-pound mark, “we’ll be running into a lot of resistance”.

One European analyst, saying that “you can’t expect the market to fall every week”, restated that supply and demand fundamentals still pointed to sugar market weakness.

‘Struggle to see any bullish factors’

Separately on Wednesday, Macquarie said that while “in the medium term, the current low [sugar] price environment will likely encourage buying activity and offer a good entry point”, it was downbeat over prices for now.

“We struggle to see any bullish factors which could lead sugar prices to recovery,” the bank said, foreseeing that “as soon as prices increase, India will start exporting more, pushing more sugar to already well supplied market”.

May sugar futures closed on Wednesday up 1.5% at 12.97 cents a pound.