Agricultural commodities rallied in H1’21.
Most prices peaked in May before easing when speculator buying interest reduced.
Sugar’s the only exception, with prices still climbing thanks to CS Brazil’s poor cane crop.

Agricultural Commodities Rallied in H1’21

Late last year, the specs started building long positions as COVID sparked concerns over inflation and food security.
Agricultural commodities then rallied in H1’21.

Since May, little has happened that would encourage commercial buying in ags, so the specs have lost interest and the long position has eroded in all commodities, except raw sugar.

Why is Raw Sugar Behaving Differently?

Raw sugar prices are currently at their highest level since 2016.
We think this is because CS Brazil is preparing for its worst cane harvest in nine years.

Since late 2020, raw sugar’s net spec position has sat between +150k and +250k lots and, for the most part, it’s held above 200k lots.
A large volume of these long positions have been held since April.
There have also been waves of buying from smaller, more agile, investors, encouraged by bullish news around the Brazilian crop.
These positions have been sustained, thanks to commercial hand-to-mouth buying before expiries.
The recent spec buying that drove prices above 19 c/lb also triggered a wave of automated computer-trading, which saw the highest front month daily volume since early July

The short-term situation in the raw sugar physical market paints a more bearish picture.
Demand is poor as high flat prices and tricky market conditions mean re-export refiners are unable to operate profitably.

Futures may weaken in the coming weeks, given the stark disconnect with bearish physical markets.
This could mean some of the newer specs exit their positions, but we shouldn’t see a wave a widespread selling.
The core group of spec buyers have a comfortable cushion of several cents, even if the 15-16 c/lb floor is reached.
At around 16 c/lb, CS Brazilian mills may look to buy back hedges to make more ethanol.

We think speculators will look to roll their positions into the H over the next month or so, which could cause the V/H spread to weaken as expiry approaches.
Traditionally, the specs like the H contract as it provides the longest run between expiries, making it easier for the futures price to detach from the market fundamentals that come into play at expiry.

With an entry point of 14 c/lb, early spec buyers should benefit from a sugar bull run over the next year or so.
There’s more positivity around long-term sugar fundamentals.
A La Nina event in Brazil is now more likely, which would deprive the 2022 cane of much needed rains in Q1.
Ethanol prices in Brazil should hold strong as demand continues amid tighter stocks.
Sugar prices will need to be high enough for Brazilian mills to maintain a high sugar mix.
We think India could divert more than 3m tonnes of sugar to make ethanol in 2022 as the Government pushes ahead with its E20 fuel mandate.

Any surplus sugar will likely be exported without a subsidy as the Government is keen to stop subsidising sugar exports by the end of 2023.
Raw sugar must continue to trade above 18.5 c/lb for Indian producers to turn a profit.