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SAO PAULO, Oct 18 (Reuters) - Funds, who are bullish on sugar and have amassed massive long positions in the commodity, are squeezing trading houses operating in Brazil which have had to cover large margin calls on their hedging operations, French trading group Sucden said on Tuesday.
Trading houses, who extend capital to local mills in exchange for their sugar, traditionally hedge their currency and sugar price risks on the futures market. They are being forced to limit taking up hedges that prices will fall by hedge funds which are pushing up the price of sugar.
This could limit the availability of credit extended to mills, which are coming out of their worst crisis in recent decades. In the short term that could take the wind out of sugar prices as mills are unable to sell forward future production. In the medium term, Brazil's ability to reverse the global sugar deficit may be impaired.
Raw sugar futures went from 10 cents in August, 2015 to nearly 23 cents currently, a jump of 121 percent to the highest levels in four years.
Luiz Silvestre, chief trader for Sucden in Brazil, said all houses have been covering heavy margin calls for a while.
"The commitments for the tradings are very high right now. There was one Friday when the market rose a lot and total margin payments reached $300 million for the day," Silvestre said on the sidelines of the Datagro sugar conference in Sao Paulo.
"So, all this profit that funds have made recently, while it is not realized, generates margin calls. Consequently, ... you end up being more selective on further credit lines to mills, that will limit further price fixing."
As the sugar market rises in the face of the supply deficit, analysts believe producers should take every opportunity to sell forward their production, locking in profits now before prices turn.
"Funds are seeing something that is giving them persistence in their position," Societe Generale director in New York, Michael McDougall, said. "The question is if they have reached the limit, if they have more cash to continue."
There is not a consensus on a price level post-funds liquidation, but Silvestre believes it could settle around 17 or 18 cents per pound.
If that happens, he says, sugar traders would get relief on their margin calls and open up more room for new hedging operations by mills. (Reporting by Marcelo Teixeira; Editing by Reese Ewing and Andrew Hay)