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Sugar breaks higher as tightening supply catches shorts off guard
Sugar futures in New York have pushed above 17 cents/lb, reaching an important area of resistance that has capped the upside on two previous occasions during the past year. Nine successive sessions of gains - the longest winning streak since January 2021, according to Bloomberg - have lifted prices by around 18%, driven by mounting concerns about tightening global supplies.
The supply outlook is becoming increasingly supportive. European sugar production is expected to fall to a decade low, while El Niño-related weather risks threaten cane output in India and Thailand, two of the world's largest producers alongside Brazil. Any meaningful deterioration in Asian crops would leave the market increasingly dependent on Brazilian supply.
One caveat is the shifting economics between sugar and ethanol in Brazil. The recent rally has pushed sugar to a sizeable premium over ethanol, strengthening the incentive for Brazilian mills to maximise sugar production rather than divert cane toward biofuel. That flexibility could eventually provide a supply response and limit the upside if current price strength persists.
Positioning has added fuel to the rally. Just before prices accelerated last week, speculators had already cut their net short position in New York sugar futures by around 30% to 77,800 contracts. With the market subsequently breaking above its long-term downtrend and the 200-day moving average, further short covering appears to have contributed to the latest surge.
Attention now turns to the 17-cent area which as mentioned has offered resistance and attracted profit taking on two previous attempts in the last year. A sustained break above this resistance zone may strengthen the technical picture further, while failure to hold the breakout could leave the market vulnerable to profit taking as the short covering squeeze fades, particularly if Brazil responds to the improved sugar-production economics.
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The instrument(s) referenced in this content may be issued by a partner, from whom Saxo receives promotional fees, payment or retrocessions. While Saxo may receive compensation from these partnerships, all content is created with the aim of providing clients with valuable information and options..
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