Speculators lock in long positions as world tastes sugar high

By Kevin Morrison and Neil Dennis –
The sugar market has hit a sweet spot. Refined sugar prices in London rose to a seven-year high last week as strong demand outstripped supply.
And traders say prices have not yet peaked, with speculators building large long positions in betting sugar will rise further.

The spike in the prices of contracts to deliver sugar in August were driven by tight supply. Brazil, the world’s largest sugar producer, and the European Union, have already sold their sugar output for August, and the impact of this was compounded by unexpected demand from Pakistan and Iraq.
The August white sugar futures price in London rose to $324 a tonne on Thursday; its highest level since September 1997. The Thursday peak represented a 27.5 per cent rise since the start of the year and a 70 per cent advance since the end of 2003. The next deliverable contract, October, was yesterday trading at $285.90 tonne, $38 below the August peak. But traders say that although the front-month spike was not sustainable, that does not mean sugar prices have peaked.
Czarnikow Sugar, the London-based commodity trader, estimates that global sugar demand will rise to 148.15m tonnes this year, up about 12m tonnes from 2002. Some of this rise in demand was attributed to ethanol production in Brazil where the sale of “flex-fuel” cars, which are able to operate on either petrol or ethanol, account for about one-third of new car sales.
Toby Cohen, head of research at Czarnikow, says ethanol demand accounts for about half of Brazilian sugar cane production, which is estimated to reach almost 29m tonnes this year and is up by almost two-thirds from four years ago.
Pakistan is importing sugar faster than usual as domestic prices have risen more than 15 per cent in the past two months after a drought cut cane sugar production in 2004 by 21 per cent. On Sunday, the Trading Corporation of Pakistan, a government agency, confirmed it had bought 100,000 tonnes of white sugar for delivery in August and September.
Another factor for the higher sugar price is that demand has exceeded supply for the past two years. Tightness in supply has attracted speculators.
The latest data from the US last week showed that speculators betting on continued price rises lifted net long positions by 18,130 to 96,327. Given that on May 10 the market was net short by 34,458 contracts, the swing reflects how investors have developed a sweet tooth for the product.
However, Mr Cohen says the market will return to surplus next year, because EU producers are expected to have their last big production surge before reform of the region’s system of protecting sugar growers comes fully into effect. The EU plans to slash its white sugar support price by 39 per cent over the two years 2006-2007.
The plans follow a successful challenge to the EU’s price support system at the World Trade Organisation.
“We will see a final push by European growers to produce as much beet as they can,” Mr Cohen says.
But the EU reform will lead to lower production in Europe from 2007 onwards, while sugar demand is expected to increase. EU countries are estimated to produce 21.16m tonnes this year, and that could rise by another 1m next year, before falling by up to 5m tonnes from 2007.
“I think we might see a dip in prices next year, before resuming upwards in the longer term,” says Mr Cohen.
Source: Financial Times