Sugar Market Rebounds on Short Covering Amid Conflicting Supply Signals

Recent trading sessions have delivered a sharp reversal in sugar futures, driven by a combination of technical factors and shifting market sentiment. The rebound highlights a classic market dynamic: while fundamental conditions remain bearish, short covering—the closing of bearish bets—can provide powerful price support in the near term. New York sugar rallied over 2.5% in recent action, while London ICE white sugar advanced more than 3%, as traders unwound bearish positions amid a weakening U.S. dollar. This technical bounce underscores the tension between underlying supply pressures and tactical market moves.

The Fundamental Challenge: Global Surplus Looms Large

The sugar market faces a profound structural headwind that has driven prices to multi-year lows. Multiple forecasters expect significant global supply surpluses for the 2025/26 season, with estimates ranging from cautious to extreme. Green Pool Commodity Specialists projects a 2.74 MMT surplus, while StoneX anticipates 2.9 MMT. The International Sugar Organization (ISO) forecasts a more modest 1.625 MMT surplus, yet even this figure represents a sharp reversal from the prior year’s 2.916 MMT deficit.

However, not all analysts agree on the magnitude. Sugar trader Czarnikow has painted a far more bearish picture, raising its 2025/26 surplus estimate to 8.7 MMT—more than five times larger than ISO’s projection. This dramatic disparity reflects differing assumptions about production trends and export flows. The USDA’s Foreign Agricultural Service (FAS) projects global sugar production climbing 4.6% to a record 189.318 MMT in 2025/26, with consumption rising just 1.4% to 177.921 MMT. Such an imbalance between supply growth and demand expansion naturally pressures prices downward.

Production Surge in Key Regions Drives Surplus Outlook

The anticipated surplus is being fueled by production surges across the world’s three largest sugar regions. Brazil, the dominant producer, is positioned for record output. Conab raised its 2025/26 forecast to 45 MMT from the prior 44.5 MMT estimate, with FAS projecting even higher at 44.7 MMT. Brazil’s sugar mills have also shifted allocation strategy, with more cane being directed toward sugar production rather than ethanol, as the cane crushed for sugar rose to 50.82% in 2025/26 from 48.16% in 2024/25.

India, the world’s second-largest producer, is experiencing a production boom driven by favorable monsoon conditions. The India Sugar Mill Association (ISMA) raised its 2025/26 production forecast to 31 MMT from the prior 30 MMT estimate—an 18.8% year-over-year increase. Through mid-January, production stood at 15.9 MMT, up 22% compared to the same period the prior year. This production surge has allowed India’s government to consider expanding sugar exports beyond the 1.5 MMT quota established for 2025/26, potentially flooding global markets with additional supply.

Thailand, the world’s third-largest producer and second-largest exporter, is also contributing to production growth. The Thai Sugar Millers Corp projects the 2025/26 crop will increase 5% to 10.5 MMT, with FAS estimating a 2% increase to 10.25 MMT. Combined, these three regions account for roughly 75% of global production, making their collective expansion a decisive factor in market direction.

Market Mechanics: Understanding the Recent Short Covering Bounce

The recent price rally, despite worsening fundamentals, illustrates how short covering operates in commodity markets. When traders hold bearish positions and prices begin to rise—triggered by factors such as dollar weakness—these traders close positions to limit losses. This technical buying can overwhelm fundamental selling pressure temporarily, creating price bounces that confound supply-side analysis.

The dollar index’s recent weakness has been a key catalyst. A softer greenback typically makes dollar-denominated commodities cheaper for overseas buyers, supporting prices. More importantly for futures markets, currency weakness can trigger position squaring among speculative traders who had bet on further sugar declines. This short covering provides a temporary floor beneath prices but does not address the underlying supply imbalance that continues to weigh on the market.

Looking Ahead: When Will Supply Concerns Return to Focus?

While the recent bounce offers relief to bulls, the medium-term outlook remains challenged by surplus projections. Covrig Analytics initially raised its 2025/26 surplus estimate to 4.7 MMT from 4.1 MMT, though it projects the 2026/27 surplus to narrow to just 1.4 MMT as weak prices discourage future production. Brazil offers a glimmer of hope on this front: Safras & Mercado forecasts Brazil’s 2026/27 production will decline 3.91% to 41.8 MMT from the expected 43.5 MMT in 2025/26, with exports falling 11% year-over-year to 30 MMT.

The current dynamic—where short covering provides temporary relief amid persistent fundamental weakness—is unlikely to sustain prices at elevated levels. Once traders have finished covering their shorts and the currency dynamics stabilize, the focus will likely return to supply-and-demand fundamentals. For the sugar market to stage a meaningful recovery, either production must disappoint expectations or demand must surprise to the upside. Until then, short covering bounces may offer only fleeting opportunities for price relief in an otherwise bearish environment.