Sugar out of favour as speculators head for the exit

The price of sugar rallied hard during July and helped drive the UN FAO sugar index up by more than 11 percent during the month. The rally was driven by a slower than expected start to the Brazilian harvest coupled with the prospect of lower production in India due to a poor outlook for the monsoon. This raised concerns that the projected 2012/13 production surplus will not materialise and money managers jumped on the story, not least helped by the bullish attitude to agriculture commodities in general.

Source: Saxo Bank

Since reaching a peak of 24 cents per pound the price however has been falling hard, especially following the technical break below 22 cents, and today we have traded below 21 cents on continued long liquidation. The chart below shows the non-commercial positioning in NY Sugar for the week ending July 31 and at that time the net position in the market stood at 153,000 contracts (17.1 billion pounds), almost equalling the highs seen in March 2012 and September last year.

Improving weather conditions during the past few weeks in Brazil have been easing harvest and export delays and industry officials in India still expect that the country will be able to export sugar during the 2012/13 season despite a weaker monsoon which is currently 17 percent below the average.

Weather concerns however still linger and these could eventually steal the focus oncemore but while speculative traders exit unwanted long positions the price of sugar risks overshooting to the downside.