The action of the fund/speculative community has been the key driver of the sugar market at diﬀerent times, and has been the especially the case recently. The large push from the Sept lows to Dec highs was a reversal of a large short position into a large long position. A deteriorating macro environment (oil under pressure, China worries, Japan going to negative rates) halted the push higher and left these longs vulnerable. The sell oﬀ through Jan ended with the specs being close to zero, although this is in a net sense. They run a core long position, so the move back to square was at the addition of new shorts. Whilst there were rumours of a willing receiver appearing in the March contract (expiry on Monday), there was no obvious catalyst for the move this week. The market rallied 10% on Tuesday and followed that with another 2% on Thursday, albeit on very low volume. These new levels have given producers a chance to add to hedging.
Going forward, we know the Brazil crush is going to be large (620 mmt). Ethanol demand looks to be set around last year, so the big question is what percent of the cane will go into sugar. The Indian drought seems to have no end, but the domestic cane price is high, and sugar pays significantly better than other crops so any rain will imply a much greater planting. The Southern areas have already been planted so that is really a story for the following year. But stockpiles are large.
COMPETITIVE CURRENCY DEVALUATIONS
Currency markets have been trapped in ranges for months. In spite of some significant turmoil at the beginning of the year, with oil and iron ore making fresh lows, the reaction from currency markets has been muted. When growth is weak everyone would prefer a weaker currency to slow imports and boost exports. The trouble is currencies are measured against each other. It could be argued there are four major currency blocks: US, China, Japan and Europe. Both Japan and Europe have negative interest rates and large Quantitative Easing programs designed to inflate their economies. China is also trying to weaken its currency to improve competitiveness as it tries to move from production to consumption for its growth. By definition then, the USD will end up strengthening at the very point in time when growth is starting to roll over. This has allowed the market to virtually remove all of the Fed’s hikes for this year.
The big lesson from this (and we are seeing it as some of the focus for the weekend’s G20 meeting) is that currency devaluations won’t be able to be used to help economies out this time. Adding another layer of complexity for policy makers as they try to dig themselves out of a very, very deep hole.