Sugar: Out of sync with fundamentals?

After a brief relief rally, the sugar market (NYBOT:SBV13) has returned to its bearish ways. Over the past year, the market has rallied leading up to — and sometimes after — the expiry of the front-month contract, as seen in Chart 1. In all likelihood, the rallies were the result of covering by shorts who wanted to book their profits and did not wish to roll over their positions. The expiry of the July 2013 contract on June 28 was certainly due to short covering, as evidenced by the over-100,000-contract drop in open interest and  the contraction in the net-short position held by funds (Chart 2).

There have been some developments on the fundamentals front.

Wet weather in Brazil during the first half of June hampered sugar crushing, prompting larger-than-expected ethanol production. It’s been drier over the past few weeks, but sugar output was down enough for analysts to revise their sugar output forecasts. Some estimates for 2013-14 output have fallen by more than 2 million tonnes.

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