Sugar-Price Surge Follows Brazil Output Drop

(Wall Street Journal) – The sugar market gave investors a buzz on Tuesday, when news of a surprisingly sharp decline in Brazilian production sent prices to their biggest percentage gain in more than six weeks.

The report, by a Brazilian trade group, rattled investors who had made large bets that sugar prices would decline amid a global glut. Those wagers—the biggest in almost 18 months—largely hinge on a big Brazilian harvest flooding the market with supply. The country produces about one-fifth of the world’s sugar.

Brazil’s main sugar-growing region experienced its worst drought in decades earlier this year, hurting the development of sugar cane, and dozens of mills have closed for the year because of poor weather and low prices, reducing Brazil’s output. But Tuesday’s report was weaker than expected.

Sugar processors in Brazil’s center-south, the country’s main sugar-cane-growing region, produced 2.05 million metric tons of sugar in the second half of October, 17% less than the year-earlier period, said the Brazilian Sugarcane Industry Association, which is known as Unica, in a biweekly report.

Raw sugar for March delivery, the most active contract on ICE Futures U.S., gained 3.6% to settle at 16.23 cents a pound Tuesday.

Unica’s data injected more uncertainty into the sugar market, which some investors say could spark bigger swings in prices. Poor weather in Brazil also has unsettled markets for other crops of which it is a major producer, such as coffee.

Brazil’s production problem “is not going to be corrected for a while,” said Jonathan Camarda, executive wealth manager at Camarda Wealth Advisory Group, who manages about $300 million.

Mr. Camarda said he “didn’t wake up this morning thinking about” sugar but Tuesday afternoon bought shares in Teucrium Sugar Fund, an exchange-traded fund that buys sugar futures. He previously didn’t have a position in the sugar market.

The sugar market was prone to snap higher because investors are so overwhelmingly bearish, analysts said. Some money managers are likely to exit from their so-called “short” bets at the first sign that supplies will be tighter than expected, causing prices to increase.

“I am not in [the sugar market] right now, but it is on my radar screen for a buy,” said Floyd Upperman, chief executive of Canal Winchester, Ohio-based trading firm Floyd Upperman & Associates.

Hedge funds and other money managers had a net short position of 60,986 futures contracts as of Nov. 4, according to the Commodity Futures Trading Commission, the most since June 2013.

Developments in Brazil’s ethanol market also may support prices going forward, some investors said. Last week, Brazil’s state-controlled oil company said it would raise gasoline prices. That makes ethanol, an alternative fuel made from sugar, more attractive to consumers and could create new demand.

In the second half of October, Brazilian mills used 57% of their cane to make ethanol, compared with 52% a year ago, according to Unica.

Many investors still expect prices to head lower.

Global sugar production is expected to outpace demand for a fifth consecutive year in the 12-month season that started Oct. 1, according to the International Sugar Organization.

While production is down recently, mills in Brazil’s center-south region have produced 29.5 million metric tons of sugar between April and October, just 0.7% behind last year’s output.

Another threat to global sugar supplies, El Niño, appears to be fading. The National Oceanic and Atmospheric Administration last week said the phenomenon of above-average Pacific Ocean temperatures that brings dry weather to Southeast Asia has a 58% chance of occurring in coming months, down from the 60%-65% chance that it forecast in September.

That is good news for sugar output from Thailand, the world’s second-largest exporter of the sweetener after Brazil.

Christopher Burton, portfolio manager in Credit Suisse Asset Management’s commodities group, which manages about $11 billion, said he has lower exposure to sugar than his benchmarks outline.

“We see the bounce today, but I don’t think the fundamentals have changed materially,” Mr. Burton said.

Others see more trouble ahead for Brazil’s sugar industry. Brazilian mills have been struggling with low prices and drought, which reduced the amount of available cane, prompting some mills to close ahead of schedule.

By the end of October, 48 mills in the center-south had shut for the season, more than three times as many compared with the same time last year, Unica said.

“We have finished our crop already,” compared with a late-November end-date most years, said Luiz Gustavo Figueiredo, commercial director at Alta Mogiana SA, a sugar-cane processor based in the northeastern part of São Paulo state. “This is the effect of the drought.”