NEW YORK: US sugar traders expect one of the largest physical deliveries against the New York futures contract in recent years when the July benchmark expires in ten trading days, as the global market struggles with bulging stocks and sinking prices.
Above-average open interest in July, representing outstanding contracts, and ballooning supplies amid a bumper crop from top producer Brazil indicate the delivery will be high, traders said on Friday.
Global sugar prices this week touched a near three-year low of 16.17 cents a lb, with crushing underway in Brazil's main producing region and expected to reach record levels in the current crop year.
A bumper Mexican crop has also weighed on prices.
Brokers estimated that between 800,000 to 1 million tonnes of physical raw sugar will be delivered against the July contract. That would equate to nearly 16,000-20,000 lots.
That is below the staggering 1.43 million tonnes seen in May - it was the largest for the sugar contract in decades - and under the 1.1 million tonnes delivered in July 2012, but would be among the largest deliveries in recent years.
It would be further evidence of a massive excess and could be a bearish sign for prices.
With the global market facing a third year of surplus in the 2013/14 crop year, which starts on Oct. 1, refineries, who are main users of raw sugar, are in no rush to buy more than their immediate needs, brokers said.
"A bigger delivery should have downward pressure, because it means people have not managed to sell sugar at worthwhile premium, and therefore they're delivering onto the tape," said a European broker.
Open interest in the July contract was almost 231,000 lots on Thursday, according to the latest data, representing 12 million tonnes of sugar and accounting for a quarter of total liquidity in the New York contract just ten trading days before its expiration on June 28.
It is double the average open interest in the July contract at this time over the past three years and is 50 percent more than the 154,000 contracts at the same time last year, according to Thomson Reuters calculations.
Volume will fall steadily as investors exit or roll futures and options positions into October before the deadline.
Total interest in ICE raw sugar futures <0#SB:> stood at 930,097 lots on June 13, down 929 lots from the previous session, but still near highs touched earlier this month and the most in more than five years, ICE data showed on Friday.
Even with the recent declines, many dealers are eyeing big volumes.
"Open interest is coming off quickly now, but it is still big, which would portend a big delivery," said Michael McDougall, senior director of the Brazil desk for Newedge in New York.
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