Sugar – Commodity

Instrument description

Sugar one of the essential soft commodity that is produced, consumed, and also traded all over the world. Sugar comes from sugar cane that is planted and cultivated in numerous countries. Sugar is a necessary part of the human diet and a staple food source that has used for cooking purposes in households and restaurants. Sugar also has an industrial use.

Sugar is a crystallized substance belonging to the carbohydrate food group and is used in the preparation of meals for thousands of years. Sugar is the main ingredient or sweetener in a wide variety of food and beverages such as ice creams, cakes, cookies, fruit juices, chocolates, ketchup, tea, and cereals. Sugar is used to flavor thousands of meals and food products, to retain moisture in cakes, and also used as a preservative in jams and jellies. Sugar is also used in ethanol production.

Sugar is widely used on a global scale, which makes it an important commodity and similar to other soft commodities such as cocoa, coffee, rice, corn, soybeans, and wheat. Sugar is produced in over 120 countries of the world, and production is more than 190 million tons every year.

Although sugar is produced in most regions, Brazil and India account for nearly half the global sugar supply, which also makes the sugar market quite volatile. According to total production, Asia is the largest region that produces sugar. The top five largest sugar-producing countries (in 1000 Metric tons) are

1. Brazil - 39150
2. India - 22200
3. European Union (E.U) - 16500
4. Thailand - 10040
5. China - 9300

According to statistics, nearly 70% to 80% of the sugar produced in a country is used domestically, and this is because most countries give huge subsidies to farmers and also put restrictions and tariffs on the import of sugar. The countries that consume sugar the most are U.S.A, European Union, China, India, and Brazil. The wide uses of sugar are

• In baked food, sugar helps to maintain the moisture and increase the growth of yeast for the leavening process. Sugar also softens and smooths the bakery items
• Sugar adds flavor and color to many fruit jams and jellies
• Due to its solubility, sugar is a primary ingredient in making candies
• Sugar is an important ingredient in all the savory desserts, custards, and puddings
• Apart from food, sugar is used in pharmaceuticals, in the textile industry, to produce ethanol, and in making glues and cement.

History of Sugar

Historical facts suggest that New Guinea was the first place where people cultivated sugarcane plants in 8000 B.C. Then civilizations in Asia also started to know how to extract sugar from the sugarcane plant. Early Polynesians also discovered the sugar cane and used its liquid nearly 5000 years ago. Famous explorer Christopher Columbus brought the sugarcane to the Caribbean in 1493, and then the sugarcane plant flourished due to favorable climate and soil.

Sugar is present in tissues of most plants, but the sugarcane and sugar beet plants are enriched with sugar and so processed in sugar mills to deliver sugar that is used for domestic consumption and export.

The sugarcane plant accounts for 70% of the entire global sugar supply and is a tall grass with thick stems. The sugar beet plant, on the other hand, contributes to 30% of the annual sugar supply. Traditionally, sugarcane plant was known to give an only limited amount of sugar, but the advancements in technology have increased the sugar yield. The regular time from planting to harvesting of the sugarcane plant is 12 to 18 months in which farmers have to prepare the cultivable land, plant the seed, provide water, and then harvest.

Supply and Demand of Sugar

Of all the soft commodities, the supply and demand for sugar is quite crucial in determining its price as more than half of the sugar produced is consumed locally, which affects the global supply of sugar. If the demand is in favor of the farmers, they plant more sugarcane plants, and if the demand is weak, then fewer plants are grown. The price of sugar is directly related to the demand, if the demand falls short or exceeds the supply then the price is affected.

How to read the price change of Sugar

Sugar is a global commodity, but its price and contract for trading are determined in a few places. Sugar is actively traded on Intercontinental Exchange (ICE), Chicago Mercantile Exchange (CME), Brazilian Mercantile and Futures Exchange (BM&F), and Multi Commodity Exchange (MCX).

Sugar is probably the only commodity that is traded as actively as other commodities due to its long production cycle. Sugar trades on the CME Globex, which is a global electronic trading platform. The symbol of sugar on the CME Globex is ‘Sugar # 11 or Sugar No.11,’ the price quotation in USD per pounds, and the minimum contract unit is 100 pounds. The trading hours are 07:30-16:59 (GMT). The Future contract expiration months are March, May, July, and October.

When we analyze the sugar price chart, we see the sugar prices trading from 12.000 to 16.000 per pound from the first week of October 2019 to February 2020. The highest value of sugar in recent months was 15.32 Cents/LB on February 12, 2020. There is a significant drop in sugar prices from March 2020, and the lowest value was 9.72 Cents/LB on April 27, 2020. The sugar prices steadily began to see Bullish trends from July 2020, and currently, the price of sugar is 11.71 Cents/LB. The Bid price is 11.74 Cents/LB. while the Ask price is 11.71 Cents/LB

How to Trade Sugar

Sugar is quite a volatile market, and short term traders can try to take advantage and speculate the price movements to profit. Investing in sugar can make your portfolio more diverse and enable you to potentially get profitable returns if the market goes your way. Investing in a basket of commodities such as crude oil, gasoline, gold, platinum, coffee, corn, and soybeans along with sugar not only expands your portfolio but reduces volatility from any one commodity and also may reduces risk of financial loss.

The popular ways to trade sugar are Exchange Traded Funds (ETFs), Futures Contracts, Options, Contract for Difference (CFD), and Shares. The sugar Futures contract is offered on both ICE and CME Globex index that settles into 112,000 pounds. Futures Contract is a derivative instrument where you make bets using leverage on the price of sugar. At expiration, the contract is physically settled on ICE, and financially on CME. Trading Futures is not easy, and you have to consider the storage costs and interest rates.

Anothe way to trade sugar is by using CFD, which is a derivative contract that allows you to predict the price movements from the start to the end of a trade. You can open a trade, and as you are speculating on the underlying asset, there is no problem of physically buying or storing sugar. With CFDs, you can profit from both the upward and downward movement of the market if your prediction Is correct. CFDs are a popular product to try and profit, but there can be significant losses, so a risk management tool may be implemented while trading.

There are no big global companies that deal with the production and selling of sugar. However, investors can buy shares of local companies who run sugar mills and distribute sugar in the markets and retail stores.

What causes the price change of Sugar?

The factors that influence the price of sugar include

• Global Supply

The global supply of sugar heavily impacts the demand and prices of sugar. Low supplies indicate strong demand and a rise in sugar prices while a surplus amount suggests low demand and a decline in sugar prices. The production cycle of sugar is quite long which affects the supply and constant fluctuation in prices of sugar

• Global Demand

Sugar is the most widely consumed commodity as millions of people across the globe daily use sugar to prepare food. Sugar is used in houses, restaurants, hotels, offices, and in factories where food items or drinks are prepared. The consumption of sugar is highest in developed countries that have a stable economy. Emerging economies of Asia and South America ensure that the demand for sugar will continue to grow.

• Government Subsidies

The government in almost every country provides subsidies to sugar producers. The subsidies and tariffs are used to portray a sufficient supply of sugar so that the prices of sugar can decline. If any one of the largest sugar-producing countries decides to stop subsidies, then it can decrease the production, and prices of sugar will rise.

• Weather Conditions

As being an agricultural crop, the weather plays a critical part in the growth and production of sugar. The sugarcane plant requires plenty of rainfall in the growing season. As most of the sugar production is concentrated in Asian countries such as India, China, and Pakistan, severe weather patterns such as long droughts or floods can drastically impact the global supply of sugar and increase its prices in the international market.

• Health Concern

Sugar is one of the key ingredients in nearly every meal and food product, but consuming excess sugar is directly linked to diseases such as diabetes, obesity, tooth decay, and heart diseases. The health risks drive most governments to put additional taxes on food products that have high sugar content. The health concerns result in a decrease in the consumption of sugar and a decrease in sugar prices.

• Ethanol Production

Apart from usage in food, sugar is used in making ethanol. Sugar is usually crushed and used to produce ethanol, which acts as an alternative fuel source for gasoline. The price of ethanol moves opposite to the price of crude oil and gasoline. If the price of crude oil and gasoline increases, then the people will look for an alternative, which can lead to an increase in demand for ethanol. Similarly, a fall in oil prices could lower the demand for ethanol.

Like all commodities, sugar is also quoted in U.S Dollars and share an inverse relationship. If the U.S Dollar is strong, then the sellers receive less profit for distributing sugar and more profit when the U.S Dollar is weak. The U.S Federal Reserve Bank usually maintains the value of USD and keeps the interest rates low to prevent inflation. A weak U.S Dollar appreciates the sugar prices, and a strong U.S Dollar depreciates the sugar prices. Increasing global warming is a cause of concern, particularly in countries that produce sugar in vast quantities.

The information above is for education purposes only and cannot be considered as investment advice. Past performance is not reliable indicator of future results.