Sugar rally stalls amid weather, demand doubts

(Agrimoney) – The rally in sugar futures stalled amid doubts over the severity of the threat of dryness to Brazil’s cane belt, and ideas that an uptick in demand may not prove sustainable.

Raw sugar futures for March, which soared more than 4% in the last session, stood 0.4% lower at 14.81 cents a pound in late deals in New York on Wednesday.

The retreat followed a failure earlier to break back above the psychologically important 15.00 cent- a-pound mark, amid uncertainties over the spread into Brazil’s key Centre South district of the dry weather which has raised concerns in coffee markets.

“Brazilian cane was damaged by the drought last year, and is going to be more vulnerable this year,” an analyst at a major sugar merchant told Agrimoney.com.

“However, so far in Brazil’s cane regions everything looks pretty normal.”

Demand question

The analyst also raised doubts over the sustainability of a run-up in Brazilian export prices which, according to research institute Cepea, rose 12% in real terms in the last three months of 2014.

While some observers, such as Kingsman, have highlighted signs of unusually firm demand for Brazilian exports, a strong start to 2015 for volumes may be down to a spillover from last month.

“Wet weather slowed port loadings in late December, and what we may be seeing is these orders now being fulfilled,” the analyst said.

Sucden Financial’s Nick Penney flagged “reports of substantial physical trading”, but said it was monitoring spreads in New York futures as a gauge of underlying demand in the cash market.

“If it is the case that substantial end- user business has been transacted then the nearby [futures] spread should tighten more,” Mr Penney said.

Speculators record bearish on sugar?

Mr Penney also flagged the potential spur to the last session’s rally from covering by speculators of a net-short positions which may have reached an all-time high early this week.

Hedge funds held a net short in New York raw sugar futures and options of more than 66,000 contracts as of December 30 – the biggest such position since April 2013, latest data from the Commodity Futures Trading Commission show.

And some other ways of analysing the CFTC data suggest that “the short position may have increased to record proportions” since then, Mr Penney said, highlighting a rise in the number of live futures contracts, even as prices were falling into early Monday.

“By Monday, we suspect a new record would have been set and this may have contributed to yesterday’s short covering, flushing out those who went short latest,” he said.

Large net hedge fund short positions can spur fears of price spikes – with short bets, after all, being closed through buy orders.