White sugar futures staged a late short-covering rally to seven-month highs, bucking the downward trend in soft commodities such as coffee and cocoa which drifted to a lower close, traders said. Benchmark March sugar finished $7.90 up, at $337.20 per tonne, on a volume of 8,630 lots.
One London-based trader said fears that companies needing to cover large short positions had fuelled the late rally, prompting funds to come into the market. "I think the rally has been overdone it was based purely on speculation, not on fact," he said.
He also cited an announcement by the Indian Farm Minister that India was likely to produce 26 million tonnes of sugar in the year to September 2008, nearly 12 percent less than earlier forecasts due to lower yield from sugarcane. A Reuters poll released on Tuesday showed aggressive buying by investment funds and falling output in top producer India will drive sugar prices north in 2008.
Cocoa and coffee futures eased off multi-year highs reached earlier this week as profit-taking and waning investment interest caused markets to correct, dealers said.
Benchmark March coffee closed down $4 at $1,997 per tonne, recovering some ground after opening $11 lower. The contract reached a 9-1/2 year high for the second month of $2,041 on Friday and touched that level again on Monday before running into profit-taking. Cocoa and coffee sprinted up at the end of last week on a wave of enthusiasm for commodities that has taken several prices, including gold and oil, to record highs.
Investors have been pulling money out of underperforming assets from last year, like stocks, and re-allocating to bonds and commodities, analysts say. But the influence of broader investor buying, rather than fundamentals, has left prices open to bouts of profit taking. Still, traders say prices are not likely to fall much as funds are in general still holding large long positions.
"Coffee has slipped off the highs but there won't be enough heavy selling in the market to knock it down further - everyone knows the funds are long in all markets," said one dealer.
Any dip would be short-lived as the industry would rush in to buy at lower levels, pushing prices swiftly back up, he said. He added that fund interest in soft commodities seemed to be waning slightly, allowing prices to correct. "With funds being so long, I'm not sure they would want to add any more now. I don't think we'll go a lot higher."
May cocoa also slipped after touching a four-and-a-half-year high on Monday due to speculative and fund interest. May cocoa closed down seven pounds at 1,144 per tonne, 31 pounds short of the 4-1/2-year high of 1,175 pounds hit on Monday. Dealers said cocoa was less overvalued than coffee and was unlikely to fall much further given the fundamentals.
On the supply side, cocoa exporters in Ivory Coast said on Wednesday they had cut estimates for production in the October-March main crop season in the world's top grower to just over 1 million tonnes from 1.1 million previously. Ghana's finance minister Kwado baah-Wiredu, said in an interview with Reuters that cocoa production in the world's No 2 cocoa grower for the 2007/2008 year was expected to be 650,000 tonnes, having reached a record 740,457 tonnes in 2005/2006 and above 600,000 tonnes in 2006/2007.
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