Prices up on buying by speculative funds

Sugar rose, extending a rally to a one-year high, as speculative funds may have increased buying towards the end of the session and as India, the commodity's second-largest producer, forecast lower production.

Sugar output in the country may decline 8 per cent to 26 million tonnes in the crop year that began in October from the previous season because of low yields, Agriculture Minister Sharad Pawar told reporters in New Delhi.

Hedge funds and speculators boosted net long positions, or bets prices will rise, 16 per cent to 220,743 contracts in the week ended January 8 from a week earlier, according to government data.

"There's a lot of new buying from speculators this morning,'' said Bill Adams, managing director of JKV Global in Chicago. The lower Indian forecast "also helped. India had a marked effect on the market last year and had depressed prices.''

Sugar futures for March delivery rose 0.3 cent, or 2.6 per cent, to 11.77 cents a pound on ICE Futures US, formerly known as the New York Board of Trade.

The price reached 11.94 cents, the highest for a most-active contract since December 29, 2006.

Prices also got a boost after an announcement from the exchange about limits on order handling for a Brazilian producer, according to Hencorp Commcor in Sao Paulo, Brazil.

"Buying was triggered'' by the notice, pushing the March contract close to 12 cents, Hencorp Commcor said in an e-mailed report. Hencorp Commcor is an affiliate of Hencorp Becstone Futures LC in Miami, which executes futures and options trades.

ICE Statement
Effective immediately, all sugar futures and options contract orders for Fluxo-Cane Overseas "may only be accepted directly from a clearing member of ICE Clear US and from no other person,'' the exchange said in a notice on its website.

ICE spokeswoman Ellen G Resnick declined to provide more details about the notice, which she said in an e-mail was "the extent of information provided on the matter.''

"Although I have no information about the details surrounding the statement from ICE regarding FluxoCane Overseas, one can speculate that the exchange is seeking to gain more control over the company's trading activity at this time,'' Justin Shea, a market strategist for MF Global unit Lind-Waldock, said in an e-mail on Thursday.

Open interest for sugar continued to rise, reaching a record 1.079 million contracts yesterday, according to exchange data. Open interest is the total number of option and futures contracts that haven't been closed, liquidated or delivered.

Other Commodities Fall
Sugar is the only commodity to gain on Thursday in the UBS Bloomberg Constant Maturity Commodity Index, which includes 26 contracts.

Sugar is benefiting from the heightened interest in agricultural markets despite the current oversupply because of the relative weakness of its prices compared with other commodities, analysts said.

The price fell 7.9 per cent in 2007. The surplus will reach 11.1 million tonnes as of September 30, the International Sugar Organisation estimates.

Global demand may exceed supply by 1.6 million tonnes in the year ending September 30, 2009, on lower output from India, and increased use of sugar cane to make ethanol in Brazil, Morgan Stanley said on January 7. Brazil is the biggest sugar producer, followed by India.

Price Forecast
Morgan Stanley increased its average-price estimate to 11.1 cents in the year ending September 30 from a forecast of 9.2 cents.

"People are starting to load up on sugar,'' Lind-Waldock's Shea said in Chicago. Investors covering bets that the price would fall also may have contributed to the rise, he said.

The rally may be curbed if investors decide to sell ahead of the March contract's expiration because May futures are more expensive, Shea said. Sugar for May delivery rose 0.22 cent, or 1.9 per cent, to 12.14 cents a pound on Thursday.

"When it comes time to liquidate, people are going to look at the high price and wonder if it's worth it,'' Shea said. "If I were bullish and wanted to see the market move higher, I would like to see March take the lead."