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Sugar Bears Come Out to Play as Surplus Swells on Asia Harvests

Updated on
  • Output is estimated at an all-time high in India, Thailand
  • Government subsidies spark overproduction, analyst says

There’s about to be enough sugar piled up in warehouses to make three chocolate cakes for every person in the world, and that’s got the market spooked.

Supplies are booming thanks to the outlook for record harvests in India and Thailand, the world’s No. 2 exporter. The glut has already sent futures in New York to the lowest since September 2015, and hedge funds are gearing up for more losses. The investors are holding the biggest net-short position, or bets on declining prices, in six weeks.

Citigroup Inc. expects a global surplus of 11.1 million metric tons this season, Aakash Doshi, a New York-based analyst, said in a March 13 report. The bank raised its outlook about 2.8 percent from a February projection, citing gains in Asian production. The excess would be big enough to almost satisfy a full year’s worth of demand in the U.S., government data show.

Given the current fundamentals, the price “is not going to improve right back,” said Donald Selkin, the New York-based chief market strategist at Newbridge Securities Corp., which has $2 billion under management. Without a big shift in demand or unexpected weather issues for crops, the oversupply probably will linger, he said.

Raw-sugar futures are down 18 percent this year to 12.46 cents a pound as of 10:32 a.m. in New York. That’s the biggest loss among the 22 components of the Bloomberg Commodity Index.

Funds are positioning for more losses. In the week ended March 13, money managers increased net-bearish holdings by 33 percent to 141,659 futures and options, Commodity Futures Trading Commission data showed Friday. The figure measures the difference between bets on a price decline and wagers on a rise.

Farm Subsidies

Some oversupply stems from government subsidies to farmers in key producing countries, James Cassidy, global head of sugar derivatives for Societe Generale SA in New York, said in a telephone interview.

In India, a government-price setting program is sparking overproduction as Uttar Pradesh and Maharashtra, the largest cane-growing states, announced higher prices for the crop, M. Manickam, chairman of processor Sakthi Sugars Ltd., said in an interview with BloombergQuint this month.

In the current supply environment, “it’s not inconceivable” for prices to drop to 10 cents, SocGen’s Cassidy said. That would be a decline of 21 percent from Friday’s close.

One positive for bulls: Lower production in Brazil is tempering the glut prospects for next year. With soaring ethanol prices amid strong demand, the country’s mills are diverting more cane to make the biofuel. The nation is the No. 1 sugar grower and exporter.

(Updates prices in fifth paragraph.)
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