The rally in sugar prices, spurred by Brazil's drought,
could gain some further support from hedge fund buying, and the discovery that
inventories are not as large as had been thought.
Raw sugar futures on Monday rebounded from pre-weekend
selling, closing up 0.8% at 17.80 cents a pound in New York for May delivery.
The gains came as Sucden Financial said that, given the
fears over the extent of damage to the cane crop in Brazil's Centre South from
drought, hedge funds may yet continue the bullish swing in positioning which
has turned them net long on raw sugar for the first time since before Christmas.
Last month, managed money turned from a net short position in
raw sugar futures and options of 58,657 contracts to a net long of 21,818 lots,
data from the Commodity Futures Trading Commission, the US regulator, show.
Given "uncertain" weather prospects in Brazil's Centre
South, responsible for some 90% of domestic output, "and the expected reworking
of cane figures for the up-coming harvest, and a potential delay to the start
of crushing activity, it could be argued that the speculative community has
more buying to come", Sucden said.
Hedge funds held a net long in raw sugar of more than
200,000 contracts as recently as October.
Separately, London broker Marex Spectron raised the prospect
that ideas of huge inventories of sugar, which had been weighing down prices
until concerns over Brazil's dryness kicked in in earnest a month ago, may
prove to have been exaggerated.
"If the world has produced more than it has consumed, that
extra sugar goes to stock somewhere," the broker said.
"But since we don't trust consumption estimates, we do not
trust stock levels."
After four years of production surplus, there has been "plenty
of time" for "unintended" sugar stocks "to begin to melt away", Marex said,
adding that this may be occurring in India, which will, after encouraging
exports, "probably will not have excessive stocks at the end of this season".
'Stuck for longer'
The conclusion from this view was that "world consumption
has been underestimated to some extent", with supplies also sapped by an
increase of supplies in the so-called "pipeline".
"International trade has grown substantially in the last
decades. Therefore more sugar is stuck for longer than in the past."
Observations that investors may have underestimated
consumption have also been made by the likes of Czarnikow, the London-based sugar
However, Marex acknowledged that there were still "plenty of
sugar stocks" in the likes of China, the European Union and the US, on paper "more
than sufficient to compensate for any foreseeable production problem in Centre
"But some of these stocks will only become available if
prices, and/or spreads [between near and more distant futures contracts], rise
The conclusion for prices was to "trust the range - but that
range has moved up a notch".