London, March 16 - The deteriorating outlook for economic growth and demand means the overall mood in commodity markets is sombre but sugar is an exception because supply is a problem, a fund manager told Reuters on Monday.
Adam Taylor, an analyst at Liongate Capital Management, said sugar stands out because there has been upward pressure on prices as India and the European Union are becoming net importers from net exporters.
The benchmark sugar futures contract in London last Friday hit $405 a tonne, the highest in 5-1/2 months.
"We haven't seen an increase in consumption, the price has been driven by a decrease in supply," London-based Taylor said.
"The acreage devoted to sugar in India has fallen and European Union reforms mean less sugar on the global market."
EU reforms designed to create a fairer global sugar trading system mean that the bloc will this year become the world's biggest importer of raw sugar.
India is the world's largest sugar consumer and swings from being a net exporter to an importer, depending on the size of its harvests. The country is currently a net importer.
Expectations are for India to produce between 15.5 and 18 million tonnes between October 2008 and September 2009, while according to senior Indian industry sources consumption could be around 22.5 million tonnes.
"The advantage of the hedge funds Liongate invests with is they have close links with physical production and consumption, the largest growers and the largest sellers," Taylor said.
As of October 2008 India was estimated by Indian trade sources to have opening sugar stocks of 8 million tonnes. The question hanging over the market is how much of that is left.
The London-based International Sugar Organization last month raised its 2008/09 (October/September) forecast for the global sugar deficit to 4.3 million tonnes from a previous forecast of a 3.6 million tonne shortfall.
RELATIVE VALUE
Liongate Capital Management has $2.2 billion under management, of which about 12 percent is invested in commodity futures. It is a fund of funds manager, which typically invest in a variety of funds with different strategies to spread risk.
Liongate's commodity fund of funds began life with $40 million of seed capital in January 2008 and was opened to external investors this month.
It invests in commodity hedge funds that can make directional trades or relative value trades -- buying one commodity and selling another.
"The energy complex is a good example of how hedge funds can make money without taking directional bets," Taylor said.
"One of the things you are seeing is that demand for industrial fuels such as diesel or jet fuel has fallen dramatically as industrial production has declined and airline traffic globally has fallen."
One barrel of oil yields various types of fuels ranging from gasoline to jet fuel to fuel oil. Many refineries have cut the number of barrels they process, because of falling demand for industrial fuels.
"Gasoline demand has not fallen as much as demand for heavier distillates," Taylor said.
"People still need to drive and the reduction in refinery runs has forced a decrease in supply. Some of our hedge funds are long gasoline and short the heavier fuels like jet fuel."