SUGAR UPDATE

The recent nearly 200 push higher in sugar came about with a very small increase in the spec posi-on. This would imply commercial interests have capitulated and covered back their shorts. Given the extent of the move higher and the small change in spec positioning it would also suggest they have been selling (taking profit) into this rally.

Following the weather, much-needed rain in Brazil has given back into dry weather. The monsoon is on track in India and it is raining in Thailand on and off. Domestic sugar prices are at attractive levels for producers almost everywhere so assuming the weather allows it, a large replant should be assumed. The sugar curve is reflecting this with higher prices near term and lower prices further out. This is referred to an as inverted curve. Near term, however, the world needs Brazilian sugar, so the market is very susceptible to a shock (be it frost or terminal fire). A break of 20c should attract technical buying and take another leg higher.

This ever increasing fund long is both a function of an a attractive macro story as well as money finding new homes out of equities, bonds and currencies. This ‘hot’ money can quickly exit a market without regard to fundamentals, and a systemic shock (such as Brexit—see right) could cause a risk unwind which Sugar positions will not escape

MACRO / BREXIT COMMENTS :

The US has kept rates on hold as widely expected after the weaker Non Farm Payrolls earlier this month, and the pace of tightening expected from the Fed Governors’ has slowed to being just over one hike expected now by the end of the year. At the beginning of the year three to four hikes were expected.

The market is watching closely the polls in the UK’s stay or leave EU membership. Whilst this vote could go the same was as the Quebec and Scottish Independence votes, the ramifications are broad reaching if they do leave. Short term, economic pain would be expected but this would be compensated for through a weaker currency. The market is worried about a nega ve spill over into risky assets (equities and commodities). The fast money that has been chasing sugar could be liquidated in favour of perceived safe havens (gold, bonds, USD). Longer term, the micro economic adjustment would be expected to outweigh the losses and Britain would be better off. This near term adjustment (both currency and economically) has the markets worried and the potential for a large risk off event is certainly on the cards.