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Sugar takes centre stake in clash between Bcom, SocGen analysis

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Sugar emerged at the centre of battle of commodity forecasts – with the Bloomberg Commodity Index seeing them as a leader of a revival in softs, while Societe Generale cautioned that a setback could lie in store.

But the analysis threw little light on a mystery over cotton pricing.

According to Bcom, the sugar market, "the primary softs driver, appears to be in an early recovery period after a substantial correction".

New York raw sugar futures for October on Wednesday stood at 14.90 cents a pound – up nearly 19% from a 14-month low reached in June.

"Soft commodities have sprung back to life on sugar, which appears to have bottomed," said Mike McGlone, senior analyst at Bloomberg Intelligence, flagging two observations from history as suggesting that this trend may have legs.

History lesson

The first was the extent of the hedge funds' net short position in raw sugar futures and options, which touched a record 117,748 contracts last month.

The last time short bets approached that level, in March 2015, came "three months before prices bottomed", Mr McGlone said, adding that hedge funds were "daring" sugar.

Secondly, the extent of price falls, balanced against a historically soft level of sugar inventories compared with inventories, suggested an increase may lie in the wings - comparing the current situation with that in 2010, which saw a "similar price divergence from a favourable stocks-to-use trend".

"From the 2010 peak to trough, prices corrected 54% before resuming the rally," Mr McGlone said.

"Prices have corrected 47% from the 2016 peak to the 2017 trough through July 31."

'Mispricing of risk'

However, Societe Generale's more negative take on sugar prospects emerged from quite a different take on commodity price prospects, taking into account the unusually low level of the Vix volatility index – the so-called "gauge of fear" - which last month hit an all-time low, and remains depressed.

This weakness in the Vix could be termed as excessive given the elevated levels of global risk, evident in factors such as Brexit, Islamic terrorism and the Trump agenda in the US.

Indeed, global economic policy uncertainty, as measured by the EPU index, which draws on mentions in media coverage, "reached its highest level earlier this year", and "remains elevated", SocGen said.

"This divergence is unusual and can be interpreted as a 'mispricing' of risk in the market."

'Highest probability of falling'

Analysis of previous such – rare – occurrences of an elevated EPU and depressed Vix revealed that the resolution of such divergence typically saw commodity prices fall.

"When risk is underpriced, almost all commodities moved lower by an average of 2.3% in the following month," SocGen said.

And sugar showed the "highest probability of falling" in such circumstances, of 86%, ahead of the likes of coffee, corn and soyoil, at a little under 80%.

Cotton conundrum

By contrast, cotton was one of the few commodities which failed to rise as SocGen's analysis would indicate (while not gaining a mention at all from Bloomberg's Mike McGlone).

And the fibre had proven a rare exception too in the opposite circumstance, in a situation of a low EPU and high Vix, which tended to herald price gains for most commodities.

Still, if SocGen's analysis revealed something of a shadow in understanding on cotton prices, well, even industry experts appear somewhat stumped, with the International Cotton Advisory Committee saying overnight that it had been flummoxed by recent strength in values.

Flagging a 19% rise to 83 cents a pound in average cotton prices, as measured by the Cotlook A index of physical values, in 2016-17, which closed on Monday, the ICAC said that the figure "ended up being much higher than the secretariat initially forecast.

"Market fundamentals do not explain why this occurred."

'Uncertain outlook'

This may hold some solace for cotton bull, after the committee forecast cotton prices tumbling to average 69 cents a pound in the new season.

"Given what happened in 2016-17, it is difficult to say whether the current forecast for 2017-18 will hold up well over the season," the ICAC said, terming the price outlook "uncertain".

By Mike Verdin

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