ETF Trends
ETF Trends

Sugar futures and commodity-related exchange traded products climbed Monday on expectations of a smaller cane to sugar output out of Brazil after a tax change that could make ethanol more competitive.

On Monday, the iPath Bloomberg Sugar Subindex Total Return ETN (NYSEArca: SGG) rose 4.4% and Teucrium Sugar Fund (NYSEArca: CANE) gained 2.8%. Sugar has staged a big rally over the past month, with SGG 14.6% higher and CANE up 12.2% over the past month.

Meanwhile, ICE sugar futures were 3.8% higher to $0.1491 per pound and were on pace for their highest close since May 30.

While Sucden Financial Research argued that most of Monday’s gains were attributed to technical buying – sugar crossed over its 50-day simple moving average – and short covering, the commodity also strengthened on news that the Brazilian government said it would reduce the tax on ethanol to lure buyers, reports Julie Wernau for the Dow Jones Newswires.

Brazil is the world’s biggest producer of sweetener, and cane producers can covert cane to either sugar or ethanol. Brazil’s tax changes could cause producers to convert more cane to ethanol or lower the supply of sugar.

“It is expected that on a forward basis, ethanol will recover its price advantage towards the end of 2017,” Nick Penney, senior trader at Sucden, told the Dow Jones Newswires.

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The last two data points out of Brazil over the progress of the harvest have also revealed bigger-than-expected percentage of cane being converted to ethanol, which supports speculation of an ongoing shift in the market.

“Whilst it is expected that the next UNICA report will still show a high sugar mix due to the good weather during July, the ethanol parity is getting higher,” Penney said, according to Reuters. “The nearby sugar price advantage is eroding rapidly.”

Meanwhile, Societe Generale warned of the oversold condition in sugar and its vulnerability to short covering, which could lead to further upward support in the event of further gains.

“Although many things have to happen to bring the sugar market in NY to a more lucrative level, we are fully convinced that we have already seen the year’s low,” Archer Consulting in Brazil said in a note.

For more information on the sugar market, visit our sugar category.