Sugar May Be Headed for 17% Drop, Ex-Morgan Stanley Trader Says

By Claudia Carpenter

Nov. 23 (Bloomberg) -- Sugar prices may drop 17 percent by the end of January as speculators exit the market after prices failed to repeat recent gains, according to Jean Bourlot, Morgan Stanley’s former head of agriculture trading.

Raw-sugar futures are heading for a second monthly decline after rising to a 28-year high in September on speculation that supplies would be curbed by bad weather in Brazil and India. The “risk is greater than the reward” now, and sugar is no longer a so-called asymmetrical trade that will only rise, according to Bourlot, who said rice prices may climb further.

“Although every trade house and investment bank is painting a rosy picture about sugar, we will have a nice flush very soon,” Bourlot said by e-mail last week from Sydney, where he manages his own money. “If you had bought sugar back in August, your return will have been close to zero, which is poor in three months.”

Hedge funds and other large speculators have cut net long positions, or bets on price gains, in New York raw-sugar futures to the lowest since April, according to U.S. Commodity Futures Trading Commission figures on Nov. 20. The sweetener for March delivery traded at 22.85 cents a pound on ICE Futures U.S. at 9:58 a.m. in London. The contract may fall to about 19 cents by the end of January, according to Bourlot.

Too Much Speculation

“I have been bullish on raw sugar for 18 months but believe, contrary to before, this trade is not asymmetrical any more,” he said. There is still too much speculative money in the sugar market, according to Bourlot, who worked at Morgan Stanley for 11 years until January. India and Brazil are the world’s two largest producers.

“Sugar is now the most consensual trade in the commodities space,” meaning that analysts are more in agreement about gains for raw-sugar futures than for any other commodity, he said. Bourlot advised buying March 2011 sugar futures when prices fall, citing “nonexistent” global inventories against future crop failures.

Rice may rise about 15 percent in two months, according to Bourlot, who traded oil options for Morgan Stanley for nine years in New York and London and was head of agriculture for 2 1/2 years in London. The Philippines, the world’s largest buyer of the grain, may make record purchases after storms destroyed crops.

“If you are looking for an asymmetrical trade in the commodities space, you should buy rice,” Bourlot said. Rice futures for March delivery, currently trading at 15.5 cents a pound on the Chicago Board of Trade, may rise to 18 cents by the end of January, he said.

To contact the reporter on this story: Claudia Carpenter in London at ccarpenter2@bloomberg.net