Australia & New Zealand Bank, highlighting dryness in Brazil, hardened its caution over
betting on further drops in sugar prices, even as prices fell below 15 cents a pound for the first time in more than three years.
ANZ senior ag economist Paul Deane underlined a warning that
Brazilian dryness poses a risk to ideas of a further decline in sugar prices, which are
already trading at amongst their lowest levels since 2010.
While the sugar market "has taken little notice" of below-average
rainfall in Brazil's key Centre South region over the past six weeks, it
represents a growing threat to hopes for a rise in sugarcane output in 2014-15.
"With little rain forecast over the next fortnight in the
region, the chances of Brazil's cane production being revised lower are
increasing," Mr Deane said, flagging the potential impact on raising prices.
"For producers, it is this type of scenario which could well
present better opportunities to hedge over coming months."
'Shorts now looking
As an extra concern for sugar bears, the dry spell comes at
a time when they have a large net short position in New York raw sugar futures
and options, questioning the appetite for further short bets, and leaving open
the prospect of a spike in prices if these holdings are closed.
Hedge funds have gone from a record net long position, of
more than 200,000 contracts, in raw sugar futures and options at the end of October
to a net short of more than 52,000 contracts, as of last week.
Forecasts for Brazil Centre South cane and (sugar) output 2014-15
Archer Consulting: 630m tonnes, (34m tones)
ANZ: 610m tonnes, (36.5m tonnes)
Bio Agencia: 600m tonnes, (34m-35m tonnes)
Safras e Mercado: 618m tonnes, (35m tonnes
"Funds are significantly net short for the first time in
five months," Mr Deane said.
"With shorts now looking stretched, and sugar prices showing
a very strong correlation to movements in fund positions over the last month,
our bias would be to be tactically long rather than short if fund positioning
was the only factor."
Poised for a rally?
The dynamics mean that "two key pillars are in place,
leaving sugar potentially poised for a rally".
However, Mr Deane, while noting that New York raw sugar
futures were nearing the low point he has forecast for prices in the first half
of the year, stopped short of issuing a buying recommendation.
At Sucden Financial, Thomas Kujawa was less recalcitrant in
foreseeing further pressure on prices for now, with the prospect of the annual Kingsman
Dubai Sugar Conference, from February 8-11, a key event in the industry
calendar, likely to allow bearish sentiment to remain in the ascendancy.
"We think little is going to change to the 'sugar story'
until we get closer to the build-up to the Dubai convention," Mr Kujawa said.
"Bulls continue to be on the back foot. A test of 15 cents a
pound seems likely in the short term."
Indeed, New York raw sugar futures for March temporarily fell below 15 cents a pound for the first time since June 2010, touching 14.97 cents a pound, before recovering some ground to close at 15.03 cents a pound, a drop of 1.3% on the day.