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How to trade sugar
Sugar is a commodity once reserved for the wealthy, but today it is one of the most commonly-traded assets worldwide. Here we look at what moves the price of sugar and discuss popular sugar trading strategies.
Sugar trading basics
According to global researchers, the sugar market will be worth more than $52.9 billion by 2022. 1 Produced from sugarcane or sugar beets, it’s used for much more than just sweetening food stuffs – everything from skin products to fossil fuel alternatives. Due to its versatility, sugar has captured the attention of traders and investors all over the world. They often choose this market because of its size and volatile nature, which offers the opportunity to profit whether its price is rising or falling. Learn how you can get started with these sugar trading basics.
Top sugar-producing countries
The top sugar producers in the world are emerging markets such as Brazil, India and Thailand. Brazil alone is responsible for producing around 39 million tonnes – the same amount as the second and third-ranked countries combined. 2
|Rank||Top producers||Sugar production (in tonnes)|
|3||EU 28||15.5 million|
What moves the price of sugar?
The price of sugar is moved by several factors that affect supply and demand. Essentially, if more people want to buy sugar than sell it, the price will rise because it is more sought-after (the ‘demand’ outstrips the ‘supply’). On the other hand, if supply is greater than demand, the price will fall.
The factors that have the biggest impact on sugar prices include:
Sugar is priced in US dollars (USD), therefore any ups and downs in the currency will affect its international price. A weak dollar generally means that commodity prices drop, and the demand increases. If the dollar strengthens against other currencies, sugar becomes more expensive and demand decreases. And, because Brazil is the largest sugar producer in the world, fluctuations in the Brazilian real (R$) also affect the price.
Tariffs that are in place to look after farmers and producers sometimes cause producers to make much more sugar than is needed in the market. Because growers are subsidised, supply increases drastically, which causes lower prices. If there is no government funding, supply will decrease.
Soft commodities like sugar are very sensitive to the climate. Sugar crops, much like coffee and cocoa crops, require plenty of sunshine and rainfall. Naturally, poor weather conditions have a troublesome effect on sugar supply.
In most developed countries, sugar has a reputation for causing various illnesses and ailments. Over the long term, a decline in sugar consumption due to fears linked to diabetes, heart disease and obesity may affect the future of sugar, leading to decreased demand and lower prices.
Sugar can be used to produce ethanol – a chemical compound that can be used as an alternative to fossil fuel. The demand for ethanol is on the increase, which could mean higher sugar prices in future.
Additionally, if you’re planning on trading shares of sugar-producing companies, it’s important to learn about the factors that affect share prices.Additionally, if you’re planning on trading shares of sugar-producing companies, it’s important to learn about the factors that affect share prices.
How to trade sugar
Choose a sugar asset to trade
Sugar is often traded using futures – contracts in which you agree to exchange a set amount of the underlying commodity at a set price on a set date. These contracts are traded on futures exchanges, such as the Intercontinental Exchange (ICE).
There are other ways that you can gain exposure to the sugar market. Your choice will depend on whether you want to own the physical assets or not. For example, you could decide to trade or invest in the shares of a sugar-producing company, such as Suedzucker. Its shares are heavily influenced by the price of the commodity, but can offer good value compared to trading sugar itself. Alternatively, you could use sugar exchange traded funds (ETFs).
Decide how you want to trade
You can trade sugar using a wide range of financial instruments, including futures, CFDs and spread bets.
Futures are the most popular way of trading sugar if you want to invest in the physical commodity, offering high liquidity and volatility. For traders, the disadvantage of trading futures includes an expectation that the physical commodity will be delivered – which they don’t want. Therefore, it’s necessary to ensure rollover arrangements are in place.
CFD trading and spread betting allows you to deal on changing prices of sugar futures and options, without buying or selling the contract. Both methods use leverage, which means you only have to put up a small margin to gain exposure to the full value of the trade. This can magnify your potential profit – but also your potential loss. And, as you won’t ever take ownership of the underlying asset, you can go long or short on its price.
Create your risk management strategy
All trading involves risk, especially if you’re trading using leverage, which is why you need a risk management strategy to protect against unnecessary losses. There are ways in which you can minimise your risk, which includes attaching stops to your positions. Stops will close your trade at a certain point if the market moves against you, to prevent you losing more than you’re prepared to.
Open and monitor your first trade
When you trade sugar with CFDs or spread bets, you can speculate on both rising and falling markets. If you think the price will rise, you would open a position to ‘buy’ sugar, and if you think the price will decline, you open a position to ‘sell’. Your trading decision should be based on your analysis of the market and your trading strategy. After you have opened your position – attaching the appropriate stops and limits – it is important to monitor your position’s progress and to keep up to date with anything that could impact the price of sugar.
Popular sugar trading strategies
Popular sugar trading strategies include trading range trading, breakout trading and fundamental trading. Your strategy should be based on your knowledge, preference and risk appetite.
Range trading strategy
In a range trading strategy, a trader will identify levels of support and resistance in an asset’s price movements and seek to buy at levels of support and sell at levels of resistance. Range strategies work best in markets with lots of price movements, where there is not any particular long-term trend.
Breakout trading strategy
Breakout trading involves trying to spot the early stages of a trend and opening a position during this period. This enables traders to capitalise on profits once the trend moves above a level of resistance or, alternatively, once it breaks below a support level. In the context of sugar trading, breakout traders will try to make a prediction about global supply for the upcoming year and open a position accordingly.
Fundamental trading strategy
Fundamental trading is a strategy in which traders depend heavily on the factors that affect levels of supply and demand. Fundamental traders will look at company-specific or region-specific events that could affect supply or demand for sugar at the particular point in time. They will then base a trade on their findings.
Sugar trading hours
|Location||White sugar trading hours*|
|New York||03:45 – 13:00 (New York time)|
|London||08:45 – 18:00 (London time)|
|Singapore||16:45 – 02:00 (Singapore time)|
*Hours are set by ICE and may vary. Hours will shift between March and November as the UK and US change to and from daylight savings on different days, while Singapore remains on Singapore Standard Time (UTC+8) all year round.
Sugar trading in summary
- The sugar market will reportedly be worth more than $52.9 billion by 2022
- Sugar is a volatile market that offers the opportunity to make a profit on both rising and falling prices
- The top sugar producers in the world are Brazil, India, EU 28, China and Thailand
- The price of sugar is moved by factors such as currency movements, government funding and weather changes
- Sugar trading strategies include trading trending markets, consolidating markets
- and volatility
- Sugar trading hours are set by ICE and vary per region
- Markets and Markets, 2020
- ISO, 2020
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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World Sugar Markets Versus Domestic Sugar Markets
Maximilian Stock Ltd./Getty Images
If you trade commodities or follow their prices, it is likely you have seen two different quotes for sugar that trades on U.S. futures markets. While three various types of wheat trade in the U.S. why should sugar be any different? However, there is a difference between sugar and wheat because there are three distinctly different types of grain that warrant three separate price structures. The case in sugar is different as the sweet commodity is homogenous.
World Sugar Markets Versus Domestic Sugar Markets
The two sugar futures markets are world sugar #11 and U.S. sugar #16.
You may be surprised to find out that the U.S. sugar price is substantially higher than the world sugar prices – at times, twice as much.
While the price differential between the two sugar contracts may lead one to believe that the U.S. produces the Rolls Royce of sugar, the sweet commodity is virtually the same around the world. The discrepancy in prices is due to subsidies and a tariff program that supports U.S. sugar farmers.
Sugar production in the U.S has been around for a couple of hundred years, but the climate in the U.S. is not well suited for growing the staple commodity. Therefore, it is more costly to produce in the U.S. than other countries like Brazil and India that have more suitable climates for production.
Sugar lobbyists in the U.S. have been able to arrange a sweet deal for sugar farmers in the U.S. The complex details of sugar subsidies are a subject of heated debate as the government guarantees a lucrative price for sugar producers and limits sugar imports from other nations. U.S. companies have to buy U.S. sugar at inflated prices.
The high price of U.S. sugar could be responsible for changes in manufacturing. Companies like Coca-Cola turned to high fructose corn syrup as a substitute for plain old sugar. I wrote an article that outlines the massive amount of subsidies given to companies to produce ethanol.
Corn is the primary ingredient in ethanol causing an increase in demand for corn in the United States. Corn is also the main ingredient in high-fructose corn syrup. Therefore, U.S. taxpayers are supporting artificially high prices for sugar and corn. The subsidies create higher prices for products containing corn and sugar that we purchase at the supermarket, so taxpayers pay twice.
Consumers have been the ultimate losers when it comes to corn and sugar subsidies. The price of sugar is not a national security matter. Commodity markets are efficient; agricultural staples grow in areas where the climate is suited to grow the best crops at the lowest price. However, this is not the case when it comes to U.S. sugar production.
World sugar costs less than U.S. sugar. The two sugar contracts are identical when it comes to the commodity but not when it comes to price.
The U.S. sugar market an example of the effect of politics and government policy on commodity markets.
Subsidies Exist in Other Commodities and Markets
The world’s largest unsubsidized producer of sugar is Brazil, and they price basis the world or #11 price. Thailand is also an unsubsidized producer of the sweet commodity.There are also other sugar futures contracts that trade on futures markets around the world such as “white” sugar or Sugar #5 that trades on ICEEU.
Subsidized prices are not exclusive to the sugar market. In fact, many nations subsidize the production of commodities as a matter of national security. These countries seek to guaranty that even if the price of a commodity falls, their citizenry will have access to that staple commodity.
If the price of a raw material falls below its production cost, a producer in a country without subsidies may decide to grow a more profitable crop on their land. A decrease in production for economic reasons could lead to shortages of a strategic commodity.
With subsidies, the theory is that the producer will receive a price that guarantees a profit each year in exchange for providing a steady supply of the commodity for the good of the people and government.
As you can see, there are pros and cons when it comes to the subsidized production of staple commodities. While subsidies are directly by the government to producers, they are ultimately funded with tax revenues. These arrangements are often the subject of debate within a government and between candidates for public office.
How to Trade Sugar CFDs
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Last Updated on November 5, 2020
4 Reasons You Might Invest in Sugar
Investors purchase soft commodities such as sugar for many reasons, but the following are most common:
- Inflation and Weak US Dollar Hedge
- Bet on Emerging Market Demand Growth
- Portfolio Diversification
Speculating on Sugar Prices
Most sugar production occurs in a few countries, and weather patterns play an important role in determining supply.
Sugar prices can be very volatile. Investors looking to speculate on short-term bottlenecks in supply might see sugar as an attractive investment.
How Does Sugar Act as an Inflation and Weak US Dollar Hedge?
Most commodity investments, including sugar, are priced in US dollars and, therefore, are a way to bet on a weak US dollar.
The US economy has relied disproportionately on consumer and government borrowing and spending over the past few decades. To incentivize borrowing, the Fed has kept interest rates low for a long period of time.
Growing debts and deficits in the United States could put pressure on the dollar and boost sugar and other commodity prices.
Betting on Emerging Market Demand Growth
Asian and other emerging economies are growing wealthier. As consumers in these countries accumulate more purchasing power, their appetite for sweet foods may grow as well. Investing in sugar might be a way to capitalize on these global trends.
Diversify Your Portfolio
Commodities such as sugar have historically had low correlations with stocks, bonds and other financial assets. Investing in sugar provides a way to diversify a portfolio and smooth out investment returns.
Should I Invest in Sugar?
Sugar is a volatile commodity, so investing in it could produce big gains or losses.
However, investing in sugar isn’t just for speculators. Commodities such as sugar can be a way to mitigate risk in an investment portfolio by providing asset diversification.
A basket of commodities that includes sugar, other soft commodities, metals and energy insulates a buyer from events that affect a particular commodity’s price.
Investing in sugar is also a way to profit from 3 long-term trends:
- Growing wealth in emerging markets could boost sugar consumption.
- Global warming trends could disrupt sugar production and lead to supply shocks.
- Demand for oil and gasoline could decline in the coming decades, and demand for ethanol could grow. Overconsumption of fossil fuels combined with heightened environmental concerns could hasten this trend and produce higher sugar prices.
Investing in sugar, however, has its risks including:
- Heightened concerns about a global obesity epidemic could curb demand.
- Strength in the US dollar could lead to weakness in commodities across the board.
- Increased government subsidies of sugar could produce an oversupply that dwarfs demand.
- Sugar substitutes such as aspartame and stevia could drive market demand away from sugar.
- Sugar is a volatile commodity that could move lower without any specific catalyst.
What Do the Experts Think About Sugar?
Experts see sugar and other soft commodities offering attractive investment opportunities in the coming years.
Shawn Hackett, President of Hackett Financial Advisors, believes that demand for sugar is strong and that the futures market suggests a rally might be coming soon.
Mike Ciccarelli, a commodity and stock trader at Briefing.com agrees. He believes that small changes in weather patterns could be the catalyst for a supply disruption and a rise in prices.
There’s minimal downside versus the potential for greater upside.
– Mike Ciccarelli, commodity and stock trader
The United States Department of Agriculture (USDA) notes lower supplies in China and Mexico could offset record production in the near future.
In sum, all of these experts see supply/demand imbalances favoring sugar prices in the future.
How Can I Invest in Sugar?
Sugar traders have several ways to invest in the commodity:
Sugar Trading Methods Compared
The New York Mercantile Exchange (NYMEX), which is part of the Chicago Mercantile Exchange (CME), and the Intercontinental Exchange (ICE) offer a contract on sugar that settles into 112,000 pounds of world sugar #11, which is the global benchmark for raw sugar.
The CME contract trades globally on the CME Globex electronic trading platform and has expiration months of March, May, July and October.
Futures are a derivative instrument through which traders make leveraged bets on commodity prices. If prices decline, traders must deposit additional margin in order to maintain their positions. At expiration, the contracts are financially settled on the NYMEX, but physically settled on the ICE.
Investing in futures requires a high level of sophistication since factors such as storage costs and interest rates affect pricing.
Sugar Options on Futures
The ICE offers an options contract on sugar futures.
Options are also a derivative instrument that employ leverage to invest in commodities. As with futures, options have an expiration date. However, options also have a strike price, which is the price above which the option finishes in the money.
Options buyers pay a price known as a premium to purchase contracts. An options bet succeeds only if the price of sugar #11 futures rises above the strike price by an amount greater than the premium paid for the contract. Therefore, options traders must be right about the size and timing of the move in sugar futures to profit from their trades.
These financial instruments trade as shares on exchanges in the same way that stocks do. There are three popular ETFs that invest in sugar #11 futures:
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