Hedge funds bought sugar at a record pace, encouraged by defaults by India mills on export contracts, but sold down on grains at the fastest pace in a year, and by more than investors had expected.

Managed money, a proxy for speculators, lifted its net long in futures and options in the top 13 US-traded agricultural commodities by 1,396 lots in the week to last Tuesday, GrainPriceNews analysis of Commodity Futures Trading Commission data shows.

However the marginal increase disguised a marked difference between their stance on Chicago grains, in which they sold a net 93,353 contracts, the most for any week since November last year, and New York-traded soft commodities, in which they bought 106,097 lots – the most on record.

The buying spree on softs was led by raw sugar, which attracted net buying of 88,753 contracts, also the highest on data going back to 2006.

‘Needs the money’

The sugar-buying spree came in a week in which prices soared by 6.8%, amid a rally viewed as reflecting in part constraints on Brazilian output, as rains slow the late-year crush and the election of Luiz Inácio Lula da Silva as president increases expectations for prices of ethanol, which competes with the sweetener for cane.

“There is a growing perception that President Lula may look favourable on helping the ethanol price,” said Marex.

“He is ‘green’, ie in favour of measures to assist sustainable fuels, and he needs the money.”

One rumour in the market is that Brazil is poised to reinstate federal taxes on gasoline, which on Marex estimates would raise the price of ethanol by the equivalent of 1.5 cents per pound in sugar terms, so enhancing the appeal to mills of making biofuel rather than sweetener from their cane.

Indian defaults

However, prices have been seen as gaining significant support too from reports of Indian mills defaulting on export contracts, after the government three weeks ago unveiled 6m tonnes of quota for shipments.

“When the announcement was made, some traders started to default on export contracts they had signed in the third quarter of 2022, as returns have moved higher since,” said Stephen Geldart at Czarnikow, estimating that India has now “only” contracted 3.5m tonnes of the possible 6m tonnes in exports.

The default has raised the prospect of snubbed buyers being forced to purchase at higher prices, given that “it’s hard to find other sources of supply” than India.

Spot Brazilian VHP (very high polarity) sugar “is valued at around 100 points premium to the futures market. Central American raw sugar for January shipment is also at a premium to the futures market, which is rare.

“Thai raw sugar is indicated at more than 100 points over the futures.”

‘Market will need to be higher’

He added that these market dynamics make “the sugar market look a bit more constructive in the future. The Indian shenanigans have exposed quite how fragile sugar supply around the world is”.

Indeed, “I think this means that the sugar market will need to be higher at some point in 2023, that it’ll break out of the top of 2022’s range”, Mr Geldart said.

“It needs to sustain higher prices for a long enough period of time to attract new investment in cane fields and cane crushing facilities.”

Back to a net long

The CFTC data also showed commercial traders, such as mills, selling heavily into the sugar price rally, lifting their gross short by 65,660 contracts week on week.

Meanwhile, hedge funds also proved significant net buyers in cocoa, by 18,509 lots, reflecting a further wave of short-covering prompted by worries over Ivory Coast logistics, as well as concerns over a dispute between West African producers and buyers resulting in supply disruptions.

The short-closing – largely at a loss – drove managed money to a net long in New York cocoa futures and options for the first time in five months.

Hedge funds closed shorts in cotton too – although may wish they had not, with New York prices falling late last week and on Monday too, undermined by economic worries.

‘Could see some technical buying’

In grains, by contrast, managed money proved a sizeable net seller in the latest week, particularly on corn, which suffered a net selldown of 60,831 contracts, the most in three years.

Sentiment on corn was undermined by an increase by the US Department of Agriculture on November 9 to its estimate for this year’s domestic yield, besides by a weak rate of US exports.

The selling exceeded investors’ expectations, said Terry Reilly at Futures International, noting a similar theme in soybeans – a factor which could offer support to prices of the oilseed, given that investors had priced in additional hedge fund sales.

“We could see some technical buying in light of the CFTC positions as some longs could bottom pick,” Mr Reilly said.

Soybean dollar redux?

However, he noted too the potential for pressure given reports that Argentina may next month roll out another “soybean dollar” programme, offering farmers sale of the oilseed at a favourable exchange rate in an effort to deter hoarding of what is a key export for the country.

“We are hearing Argentina crush rates are not as good as they were… so more soybeans this round could end up exported rather than be crushed,” and compete with US shipments.

Chicago soybean futures for January in fact stood 0.3% down at $14.24 ¼ a bushel in early deals on Monday.