2014.06.2300:31:06UTC+00Dry weather pushes hedge funds to bet on sugar

Money managers have taken a season met with unusually low levels of rainfall in Brazil as an indicator to reposition themselves on the commodities market. For the first time in nearly a month, investors have extended their net long trades in sugar as unfavorable weather continues to hound the South American country making worse the effects of a drought in the first quarter.

Likewise, in India, the world’s top producer behind only Brazil, fears of El Nino have begun casting concern that output of the prime commodity will not be able to keep up with global demand causing a shortage as soon as the end of September.

Sugar prices have risen to its highest in eight months as a result of the threat in supply. In the US market, ICE Futures of sugar per pound gained 5% the previous week to reach a value unseen since October of 18.79 cents. Indexes tracking the commodities market have similarly gained led by the 1.4% increase of the 24-commodity measure GSCI index and the 0.9% gain of the smaller S&P GSCI Agricultural index.

With the rise, bullish positions for sugar have gone up to 76,477 contracts for both futures and options as of last week, according to statistics from the US Commodity Futures Trading Commission.

This season’s poor weather conditions are seen to have a heavy impact in Brazil’s harvest of the sugar sourced from crushed cane starting with a decrease of as much as eight metric tons per hectare to only 71 tons per year. The New York-based brokerage firm Newedge Group estimates that the current harvest will fail to match last season’s 597 million tons amounting to only 560 million tons.

Another potential stress factor for the already troubled stressing sugar supply is the expected change in the composition of ethanol in Brazil’s gasoline. With a 1% increase seen to make the fuel 26% ethanol, more sugar will have to be diverted towards the creation of biofuel instead for consumption.

Source:

http://www.bloomberg.com/news/2014-06-22/hedge-funds-bet-on-sugar-as-dryness-threatens-crops-commodities.html