Short Covering Fuels Sugar Rally as Dollar Depreciation Unlocks Technical Momentum

Sugar futures staged a sharp recovery on Tuesday, with New York’s March contract (SBH26) climbing 2.59% and London’s white sugar contract (SWH26) surging 3.06%. The unexpected strength emerged from a combination of short covering activity—traders closing out bearish bets—triggered by currency weakness in the U.S. dollar index (DXY00). This technical bounce provides important context for understanding the broader bearish pressures that have defined sugar markets throughout recent months.

Technical Recovery Driven by Currency Dynamics

The mechanics behind Tuesday’s rally reveal how financial market movements ripple across commodity futures. When the dollar weakens, traders holding short positions in dollar-denominated commodities like sugar face losses. This forces covering action—the unwinding of bearish positions—which mechanically lifts prices regardless of underlying supply-demand fundamentals. Tuesday’s bounce, while notable, represents this technical correction rather than a reversal of the fundamental headwinds pressuring global sugar markets.

The rally occurred against a backdrop of relentless supply concerns. Just hours earlier, on Monday, New York sugar had touched a 2.5-month low while London futures hit 5-year lows. These declines reflected mounting evidence that global sugar production continues to outpace consumption, establishing a structural bearish environment that a single day’s short covering cannot resolve.

Brazil’s Record Output Reshapes Market Expectations

Brazil, producing roughly one-quarter of global sugar supply, presents the most immediate factor in supply dynamics. Brazil’s sugar output for 2025-26 reached 40.222 MMT through year-end, representing a 0.9% year-over-year increase. More significantly, the allocation of cane for sugar production rose to 50.82% in 2025-26 compared to 48.16% in 2024-25, signaling producers’ confidence in profitability. The Brazilian crop agency Conab has projected total 2025-26 production of 45 MMT for the season.

However, projections for 2026-27 suggest the production trajectory may reverse. Consulting firm Safras & Mercado forecasted that Brazil’s 2026-27 output will decline 3.91% year-over-year to 41.8 MMT, with exports falling 11% to 30 MMT. This pullback reflects expectations that weak prices will ultimately discourage production expansion, creating a rebalancing mechanism for subsequent seasons.

India’s Production Surge Complicates Export Dynamics

India’s 2025-26 sugar production through mid-January reached 15.9 MMT, representing a 22% year-over-year jump. The India Sugar Mill Association (ISMA) maintains a full-season forecast of 31 MMT, up 18.8% year-over-year. This surge contrasts sharply with 2024-25 dynamics and reflects favorable monsoon conditions and expanded sugar acreage.

The critical variable for global prices centers on India’s export policy. After implementing quotas in 2022-23 to protect domestic supplies, India’s food ministry subsequently authorized 1.5 MMT of exports for 2025-26. Discussions around additional export permissions create the specter of even larger supplies entering global markets, potentially exacerbating the oversupply narrative. India ranks as the world’s second-largest sugar producer, meaning its policy decisions carry outsized influence over international market balance.

Thailand’s Production Expansion Adds Global Oversupply Pressure

Thailand, the world’s third-largest producer and second-largest exporter, contributed additional supply growth concerns. The Thai Sugar Millers Corp projected that 2025-26 production will increase 5% year-over-year to 10.5 MMT. While modest in absolute terms relative to Brazil and India, Thailand’s position as a major exporter means its production directly influences global traded volumes.

The USDA’s Foreign Agricultural Service predicted Thai 2025-26 output of 10.25 MMT, representing a 2% year-over-year increase, reinforcing the consensus view of continued expansion.

Multiple Forecasters Signal Record Global Oversupply

The disagreement among forecasters regarding surplus magnitude underscores the complexity of global sugar balances. The International Sugar Organization projected a 1.625 MMT surplus for 2025-26, contrasting sharply with estimates from other major institutions:

• Covrig Analytics raised its surplus estimate to 4.7 MMT in December, up from 4.1 MMT in October
• StoneX projected a 2.9 MMT surplus
• Green Pool Commodity Specialists forecasted 2.74 MMT for 2025-26 and 156,000 MT for 2026-27
• Sugar trader Czarnikow offered the most aggressive view, estimating an 8.7 MMT surplus, up 1.2 MMT from prior estimates

The USDA presented the most comprehensive outlook, forecasting global 2025-26 sugar production of 189.318 MMT (up 4.6% year-over-year), human consumption of 177.921 MMT (up 1.4%), and ending stocks of 41.188 MMT (down 2.9%). India’s production was projected to jump 25% to 35.25 MMT, while Brazil’s would rise 2.3% to a record 44.7 MMT.

The variance in surplus estimates—ranging from 1.625 MMT to 8.7 MMT—reflects differing methodologies and timing assumptions. However, all forecasters agree on the directional view: global sugar supplies will exceed consumption demands in 2025-26.

Looking Forward: Short Covering Versus Structural Oversupply

Tuesday’s short covering rally provided temporary technical relief but does not address the underlying fundamental imbalance. The global sugar market faces a structural oversupply situation driven by record Brazilian output, surging Indian production, expanding Thai harvests, and potential policy shifts around Indian exports. While weak prices may eventually curtail production expansion for 2026-27—as forecasters like Covrig and Safras & Mercado anticipate—the near-term reality remains bearish for prices.

The short covering observed Tuesday illustrates how technical factors can create volatility within a directionally bearish trend. Currency movements, positioning flows, and short-term financial market dynamics add noise to the fundamental narrative. However, with multiple major producers expanding supplies and global surplus estimates ranging from 1.6 to 8.7 MMT, the technical bounce appears more likely a counter-trend move within a longer-term downward trajectory than the beginning of a sustained recovery.