Sugar prices tumbled Thursday, as some bullish traders threw in the towel amid signs of soft demand.
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Raw sugar for July delivery fell 2.6% to 15.36 cents a pound on the ICE Futures U.S. exchange, on track to hit the lowest level in a year.
A narrowing premium that refined sugar commands over raw sugar indicates that expected demand may have cooled. In London, white sugar prices have been retracing in tandem with the New York raw futures. As a result, the white premium has weakened from over $110 per ton to at around $103.
Because white sugar is the finished product and immediately marketable, strength in the whites often heralds an upward reaction on the raw sugar, and vice versa, analysts say.
"The refined market may have been suffering from renewed concerns on increasing supply, especially by Europe beyond October when quotas are abolished, and also by a perceived cooling down of cross border demand into China as the authorities clamp down on smuggling," wrote Nick Penney, senior trader at Sucden Financial Research.
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. During the first quarter, China's official sugar imports increased 47.7% to 890,000 tons.
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This week'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.
Analysts noted that open interest of the most-active July contract has increased by 18,500 contracts in the week ended Tuesday, a period that Friday's Commitment of Traders report will cover.
"We have another strong indication that this report will confirm...another significant increase in specs' gross shorts and that they will be net short in sugar for the first time since September 2015," according to Bruno Zaneti, a senior consultant at INTL FCStone.
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. Prices fell further in recent days as a result of negative news from Europe and China.
But some analysts note that the market is at the danger of overshooting on the short side, given the low stock levels. 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.
Sucden's Mr. Penney noted that some traders were buying insurance against a turnaround in the market in the form of "bull fences," or buying calls and selling puts. "It shows that some are prepared to build a position in case the market turns but it also shows that there is still apprehension on the downside," he said in a Thursday note.
In other markets, cocoa for July was up 1.6% to $1,809 a ton, arabica coffee for July fell 2.9% to $1.3345 a pound, frozen concentrated orange juice for July was down 2.5% to $1.4575 a pound, and July cotton added 0.5% to 79.13 cents a pound.
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(END) Dow Jones Newswires
May 04, 2017 11:38 ET (15:38 GMT)