Sugar prices tumbled Tuesday, as traders turned their focus to the prospect of a global surplus after a wild week of trading.
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Raw sugar for July delivery fell 1.9% to settle at 15.88 cents a pound on the ICE Futures U.S. exchange.
Last week, sugar prices had dropped to as low as 15.34 cents a pound, the lowest in a year amid a massive physical delivery against the expired May contract, before surging more than 4.5% in one day. Volumes were thin Monday in New York as trading session was shortened due to a public holiday in London.
With regular trading hours resuming, sugar prices rallied initially before giving back all the gains. In a surprising move, the July contract settled below the nearby physical prices in Brazil, which often trade lower than the exchange prices.
"The trade is worried that China is going to make it tougher for imports" by curbing smuggling through neighboring countries, said Michael McDougall, director of commodities agency at Societe Generale SA.
Domestic sugar prices in China are significantly higher than global prices, giving traders an incentive to send sugar into the country. However, rampant smuggling has caused backlashes from local producers and refineries, leading the government to take steps to contain the illegal activity.
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During the first quarter, China's official sugar imports increased 47.7% to 890,000 tons. But in recent days, the white premium has pulled back, suggesting that smuggling into China is becoming tougher.
Tuesday's price decline dealt yet another blow to sugar bulls. In the week ended April 25, managed money slashed their net long positions for the ninth consecutive week to 13,656 contracts, putting them at just 5% of their historical net long positions hit in September 2016.
"A failure here and a settlement below 16 cents could trigger further losses," said James Liddiard, an analyst at Agrilion Commodity Advisers, a New York-based consultancy.
Since February, sugar prices have been in a downward trend as expectations of significant sugar imports from India didn't materialize. Despite the sharp fall in India's sugar production, domestic consumption tumbled as a result of the government's demonetization move, hence reducing the need for imports.
"We maintain our neutral view on sugar but now have a positive bias as the sharp decline in prices from current levels might curb production in Brazil," wrote Rajesh Singla, global head of agricultural commodities research at Societe Generale SA.
At the current prices, the market hasn't assigned any premium for the much lower global stocks, Mr. Singla said. Global stock-to-use ratio is likely to fall to 16.6% in the marketing year of 2017-2018, which will be the lowest since 1986-1987.
The focus is on India, analysts say, as it is one of the few places where supply is likely to fall short of demand. How much India's sugar production would be recovered, and to what extent its consumption would be normalized as the impact of demonetization fades, are the key factors for sugar's future price path, analysts say.
In other markets, cocoa for July was down 0.4% to close at $1,805 a ton, extending its losing streak into a fourth session. Arabica coffee for July gained 0.3% to settle at $1.3625 a pound, frozen concentrated orange juice for July was down 1.1% to settle at $1.5415 a pound, and July cotton added 0.5% to close at 79.37 cents a pound.
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(END) Dow Jones Newswires
May 02, 2017 15:57 ET (19:57 GMT)