The sugar market has been one of the few bright spots in the commodity futures. Since most commodity exposure is long only and this market has rallied between 45%-50% since bottoming in late August it has become a commodity darling. There are three primary reasons for the recent rally. Of these, only one is structural. We feel the transitory nature of the other two will conspire to bring prices back down as the #11 sugar futures tighten their link to domestic prices in the primary growing regions.
Sugar futures have rallied more than 40% since the August 24th low. Let that sink in for one second. That’s 40% in 37 business days, a solid rally to say the least. This rally has brought the market back to exactly, unchanged on the year yet, well below the $.30 and $.36 per/lb highs of 2011’s rallies. Interestingly, this rally appears to have been fueled by supply fears shifting to short covering. The main growing regions are preparing for the impacts of this year’s El Nino event even though our own El Nino research has shown that historically, El Nino fears spur rallies to be sold in the sugar market. Furthermore, the recent rally has finally forced many long-term short positions to cover in the face of heavy commercial selling as this rally has progressed.