After five years of price weakness and over-supply, sugar has become one of the best-performing agricultural commodities © FT montage; Reuters
It was a week that started with an overwhelmingly bullish tone, but as the sugar market’s movers and shakers tucked in to prawns and lamb at a dinner to mark the end of London Sugar Week last Thursday, their enthusiasm seemed a little tempered.
This year’s sugar event comes as the sweetener has rallied more than 50 per cent, becoming one of the best-performing agricultural commodities this year. After five years of oversupply and price weakness, the sugar price started its ascent last August after hitting a seven-year low, and world demand is forecast to exceed overall production in 2016-17 for the second crop year running.
Sugar prices reflected the ebullient mood, last week hitting a four-year high of almost 24 cents a pound. But as traders, buyers and investors went from seminars to cocktail parties to networking events, some started to question the overwhelming positive mood at the start of the week.
The sheer number of bulls was a bearish signal in itself, say some traders.
“When everybody is too bullish, that is bearish,” says Kona Haque, head of research at agricultural commodity traders ED&F Man.
Another factor was the focus on the supply increases in response to the high sugar price. Production over the past two years has declined partly due to the low prices as sugar cane farmers in countries such as Brazil failed to replant while sugar beet farmers switched to other crops. However, higher prices will mean that this trend will reverse, eventually leading to excess supply.
Robin Shaw, analyst at Marex Spectron, says: “There is this growing realisation that there will be a considerable bounceback in production in 2017-18.”
But what many in the sugar market find particularly unnerving is the record levels of bullish bets held by hedge funds and other speculative funds.
Although the latest figures from the US Commodity Futures Trading Commission show that “net longs” — the bullish bets minus the bearish bets — by speculative investors have fallen slightly, at just below 300,000 contracts, they are at levels not seen before.
Speculators’ bullish bets have been rising since February this year, when it became clear that after years of oversupply, the market was going to shift into a shortage due to adverse weather and ageing canes.
“What started with a few fundamentally-driven speculators going long, soon attracted more buying from algorithm and trend-following funds, as well as more general macro funds,” says Ms Haque.
The fear is that due to the speculative nature of the bets, a political or financial event, which may or may not be related to the sugar market could lead to a sharp sell-off as investors attempt to secure profits, square positions or to cover losses in other investments.
Bad news from the banking sector or reverberations in the financial markets stemming from the US presidential elections could trigger a sell-off, warn some sugar traders.
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“I think we’ll have a day of reckoning,” says one London-based sugar trader ominously.
For now, the underlying supply situation is expected to continue to provide support to prices.
With inventories at the lowest level in six years, the market is running on empty, say analysts.
“The real problem is that these last five years of low prices have allowed people to run stocks down to nothing. Not only do we need to stimulate production, we are also at the mercy of any kind of weather event,” says Mr Shaw.
Sugar cane has a full plant cycle of about six to seven years, but due to the decline in profits due to low sugar prices, growers in Brazil, the largest sugar producer, are only replanting their cane this year.
With the replanted cane taking about a year to bed down, the market will only feel the benefits of the replanting in 2018, says Andy Duff, global strategist for sugar at Rabobank in São Paulo. With Brazil continuing to produce under par next year, “[the situation] will be supportive for prices”, he says.
However, traders and investors will also need to keep an eye on production in other producers. Normal weather combined with the high prices could mean bigger supplies from countries such as Thailand and India. Brazilian changes to its ethanol tax could lead to its sugar mills favouring sugar production over ethanol from cane, while Europe’s sugar market reforms will mean that restrictions on the region’s producers to export will be lifted next year.
One executive at a leading sugar trading house says: “I’m not ready to be short but would be very, very uncomfortable being long. If I were a hedge fund with a long sugar position, I would say it’s time to sell. I would be putting money in my pocket at these prices.”
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