Are Producers Caught in Sugar Bull Run?
Today’s Spotlight Market
While Sugar futures appear to be in the midst of a price rally based on market technicals, there are still some fundamental factors that are also favoring the bull camp. One major international bank has raised its estimate for the global Sugar deficit to 8.5 million metric tons for the 2015-16 season. In addition, average analyst forecasts are calling for a 5.8 million metric ton deficit for the 2016-17 season as well. Much of the deficit was blamed on lower than expected Sugar production out of Asia at the same time that Sugar demand has risen. It now appears that Brazil will need to see a sharp rise in production this coming season to help prevent the market deficit from rising as we move into 2017.
Fundamentals
Sugar futures have been in a bullish phase for most of 2016, with the lead month July futures posting gains of nearly 5 cents per pound since the start of the year. Among the noted reasons for the price gains have been tighter global supplies, a weak Brazilian Real and a general move by speculators back into commodity markets following what appears to be a major low now in place for Crude Oil.? While all of these factors can be attributed to the bullish interest in Sugar, it is starting to appear that market technicals may be the biggest reason behind the trajectory of the price move. First, we can look at the overall positions of the two biggest participants in the Sugar market, that being large speculative commodity funds and Sugar producers.
A look at the most recent Commitment of Traders report shows that non-commercial traders, who are normally large speculative accounts as well as commodity funds, have increased their overall net long position by over 12,000 contracts during the reporting period ending June 7. This increases the overall net-position to over 309,000 contracts, which while a very large position, is still shy of extreme levels which would likely occur should we move to over 400,000 contracts.
On the other side of the large specs are the commercial participants who added over 17,000 new net short positions during the same timeframe. The commercial net-short position is now over 365,000 contracts, and while producers are selling to try to ?lock-in? favorable prices during the rally, we must remember that there is a cost to hedging and some producers may look to lift their hedges, especially if they believe prices could head higher, which would add further fuel to the bullish trend.
While several analysts are starting to believe that Sugar prices have moved too far too fast and a potentially significant price correction could occur, we may need to see further producer short-covering to occur first. Traders should prepare, however, for the potential of increasing price volatility in not only the Sugar market, but in other markets that have made some big moves the past several months like Coffee, Soybeans and Milk futures.
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