The strong El Nino weather pattern has helped sweeten sugar prices and related exchange traded products, with commodity traders at their most bullish in seven years.
Over the past three months, the iPath Bloomberg Sugar Subindex Total Return ETN (NYSEArca: SGG) gained 29.7% and the Tecrium Sugar Fund (NYSEArca: CANE) rose 18.6%.
ICE Sugar #11 futures contracts were trading around $0.153 per pound Monday.
Commodity speculators have accumulated the largest net-long position in sugar since march 2008 as El Nino weather triggered excessive rains in Brazil and unusually dry conditions in Southeast Asia, reports Rudy Ruitenberg for Bloomberg.
The El Nino phenomenon typically elevates temperatures in the Pacific, and it has started setting records, with some of the highest weekly temperatures ever recorded across the equatorial Pacific. Consequently, the shift in the weather pattern has left regional effects on sugar. For instance, in India, the reduced monsoon rains could lead to lower sugar crops. [El Nino Heating Up Commodity ETF Impacts]
Wet conditions in Brazil could damage sugar harvests. World Ag Weather calculated that Brazil’s northern areas received over twice the normal rainfall in the past month. FCStone projects that a deluge in Brazil’s main-producing region could leave output 1 million tons lower than anticipated.
Moreover, rising demand in Brazil for ethanol use in cars, along with higher prices for the fuel, has increased expectations that sugar canes could be used to produce energy, further lowering the supply outlook. The weakness in the Brazilian real currency over the past year has made ethanol an attractive alternative to higher-priced, U.S. dollar-denominated gasoline. [Sugar ETFs Breaking Away from Commodities Slump]
After a five-year surplus that pushed sugar prices to the lowest since 2008 in late August, demand is expected to outpace supply in the 2015-16 season.
“The end of the surplus cycle is probably the main reason why people are betting on further price rises,” Michaela Kuhl, an analyst at Commerzbank, told Bloomberg. “We’ll see how much of that will really materialize.”
iPath Bloomberg Sugar Subindex Total Return ETN
For more information on the sugar market, visit our sugar category.
Max Chen contributed to this article.