5 Ways to Trade Sugar

Sugar Trading

Why is Sugar Valuable?

Sugar is a carbohydrate that has been used as an ingredient in food for thousands of years.

Evidence suggests that people in New Guinea domesticated the sugarcane plant as far back 8,000 BC and that civilizations in Asia began extracting sugar from the crop shortly thereafter. 

Today consumers use sugar to flavor foods such as chocolates, to help retain moisture in baked goods such as cakes and to preserve and gel other foods including jellies and jams. Sugar also can be used to make ethanol fuel.

These diverse applications make sugar an important commodity on the global markets.

How is Sugar Produced?

Global production of sugar exceeds more than 120 tons annually and takes place in 121 countries

Although sugars reside in the tissues of most plants, the sugar cane and sugar beet plants provide most of the sugar grown commercially for production.

The sugarcane plant, which is a tall grass with thick stems, accounts for about 70% of the annual global supply of the commodity, while the sugar beet plant supplies the remaining 30%.

Historically, only the sugarcane plant produced sugar, and it yielded very small quantities. However, modern technology has increased the yield.

Sugarcane Farming

Sugarcane Farming via Pixabay

Although sugar is produced all over the world, the ten largest producing countries account for about three-quarters of all sugar production. Two countries, Brazil and India, produce about half of the global supply. This concentration of production makes sugar an especially volatile commodity.

World's Biggest Sugar Producing Regions

Top 10 Sugar Producing Regions

RankFlagCountrySugar Production per Year (1,000 Metric Tons, Raw Value)
#1Flag of BrazilBrazil39,150
#2Flag of IndiaIndia22,200
#3Flag of European UnionEuropean Union16,500
#4Flag of ThailandThailand10,033
#5Flag of ChinaChina9,300
#6Flag of USAUnited States of America8,135
#7Flag of pakistanPakistan6.140
#8Flag of MexicoMexico6,314
#9Russia6,200
#10Flag of AustraliaAustralia5,100

As much as 70 to 80% of sugar produced is consumed in its country of origin. The principle reason for this phenomenon is that many countries heavily subsidize sugar farmers and place tariffs on sugar imports

The largest consumers of sugar are India, European Union, China, United States and Brazil.

Sugar not only sweetens food, but it also functions to preserve and maintain the freshness of many foods. Some of the most important applications of sugar in food include:

5 Main Uses of Sugar

Use of SugarDescription
Baked Goods
Cake Icon
  • Sugar inhibits the growth of certain microorganisms. This in turn slows down the spoilage of baked goods and helps them maintain their moisture.
  • Sugar softens bakery products.
  • Sugar provides a source of nutrition for the growth of yeast, which helps the leavening process.
  • Jellies and Preserves
    Jam Icon
  • Sugar enhances the colors and flavors of many fruits, which makes it ideal in jellies and jams.
  • Sugar aids the gelling process, which helps give texture to these products.
  • Candies
    Candy Logo
    Sugar is the main ingredient in most candies. Its solubility makes sugar perfect for forming and shaping candies.
    Cooking
    Pizza Icon
    Sugar is a key ingredient in custards and puddings as well as in savory dishes in many cultures.
    Non-Food Uses
    Beer Icon
  • The fermentation process to make alcoholic beverages uses sugar.
  • Certain pharmaceuticals contain sugar.
  • The textile industry uses sugar to size and finish fabrics.
  • Sugar slows the setting of cements and glues.
  • Sugar can be used to produce biofuels.
  • Ready to Start Trading Sugar?

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    What Drives the Price of Sugar?

    1. Global Supply
    2. Global Demand
    3. The Brazilian Real
    4. Government Subsidies
    5. Weather
    6. Health Concerns
    7. Ethanol Demand
    8. The US Dollar

    Global Supply

    The key driver of sugar prices is the global output of the commodity.

    The typical planting to harvest of sugarcane takes 12 to 18 months. Farmers have to prepare the soil, seed, irrigate and harvest the crop during this cycle. When farmers expect a favorable demand climate, they plant more crops, and when they expect weak demand, they plant fewer crops. When demand exceeds or fall short of supply, prices react accordingly.

    Global Demand

    An important constituent of global demand is the correlation between affluence and sugar consumption.

    Since sugar is viewed as more of a luxury than a necessity, wealthier economies generally have higher consumption than poor economies. Emerging economies in Asia and South America are the fastest growing consumers of sugar, so continued strength in these economies is positive for prices, while an emerging market bust could depress prices.

    The Brazilian Real

    Brazil produces and exports such a large percentage of the annual sugar crop that fluctuations in its currency can have a major impact on sugar prices.

    Brazilian Farmers Load Their Trucks with Sugarcane

    Brazilian Farmers Load Their Trucks with Sugarcane – Image via Wikimedia Commons

    When the real is weak, Brazilian farmers have an incentive to produce more sugar for export to countries with strong currencies and greater purchasing power.

    When the real is strong, Brazilian farmers are more likely to sell in the local market, where sugar is used to make ethanol, and receive reals for their sugar.

    A weak real means greater supply on global markets and lower prices.

    Government Subsidies

    The sugar industry has a long history of government subsidies and tariffs being used to protect local sugar producers.

    Subsidies and tariffs distort the market by creating artificially high supply and depressing prices. If the largest sugar-producing countries stopped subsidizing growers, then production could fall and prices could rise.

    Weather

    Successful sugar crop production requires frost-free conditions and ample rain during the growing season. Since sugar production is heavily concentrated in a small handful of countries, poor weather conditions in one or more of these countries can have a very disruptive effect on supply.

    Health Concerns

    Sugar consumption has been linked to diabetes, obesity, heart disease, tooth decay and other ailments. Governments are under pressure to address high obesity rates, and this could lead to taxes and restrictions on high-sugar items. Health concerns could lead to a decline in sugar consumption and a fall in prices.

    Ethanol Demand

    Sugar can be crushed and used as an ingredient to make ethanol. Since ethanol competes with gasoline as a fuel source, its demand often moves inversely with oil and gasoline prices. A fall in oil prices could depress sugar demand for ethanol, while higher oil prices could increase demand.

    Factory Produces Ethanol from Sugar

    Factory Produces Ethanol from Sugar – Image via Flickr

    The US Dollar

    Sugar, like other commodities, is quoted in US dollars. Sellers of sugar receive fewer dollars for their product when the US currency is strong and more dollars when the currency is weak. A strong US dollar depresses sugar prices, while a weak US dollar lifts them.

    4 Reasons You Might Invest in Sugar

    Investors purchase soft commodities such as sugar for many reasons, but the following are most common:

    1. Speculation
    2. Inflation and Weak US Dollar Hedge
    3. Bet on Emerging Market Demand Growth
    4. Portfolio Diversification

    Speculation

    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.

    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.

    Bet 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.

    Portfolio Diversification

    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:

    1. Growing wealth in emerging markets could boost sugar consumption.
    2. Global warming trends could disrupt sugar production and lead to supply shocks.
    3. 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:

    1. Heightened concerns about a global obesity epidemic could curb demand.
    2. Strength in the US dollar could lead to weakness in commodities across the board.
    3. Increased government subsidies of sugar could produce an oversupply that dwarfs demand.
    4. Sugar substitutes such as aspartame and stevia could drive market demand away from sugar.
    5. 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. 

    Sugar Trading Experts

    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

    Method of InvestingComplexity Rating (1 = easy, 5 = hard)Storage Costs?Security Costs?Expiration Dates?Management Costs?

    Leverage?

    Regulated Exchange?
    Sugar Futures5NNYNYY
    Sugar Options5NNYNYY
    Sugar ETFs2NNNYNY
    Sugar Shares2NNNNYY
    Sugar CFDs3NNNNYY

    Sugar Futures

    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 employs 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. 

    Sugar ETFs

    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:

    iPath Dow Jones-UBS Sugar Total Return Sub-Index ETNTeucrium Sugar FundiPath Pure Beta Sugar ETN

    Shares of Sugar Companies

    There are virtually no pure-play global public companies engaged in the production and sale of sugar. Imperial Sugar was a public company before being acquired and taken private in 2012. Investors could purchase shares of India’s largest sugar producer Bajaj Hindusthan Ltd on the Bombay Stock Exchange.

    CFDs

    One way to invest in sugar is through the use of a contract for difference (CFD) derivative instrument. CFDs allow traders to speculate on the price of sugar. The value of a CFD is the difference between the price of the shares at the time of purchase and the current price.

    www.plus500.comOpening an Account with Plus500

    Many regulated brokers worldwide offer CFDs on sugar. Customers deposit funds with the broker, which serve as margin. The advantage of CFDs is that trader can have exposure to sugar prices without having to purchase shares, ETFs, futures or options.

    Plus500 logo

    One of the leading brokers for trading agricultural commodities, like sugar, is Plus 500. Here’s why:

    • No commission on trades (other charges may apply)
    • Free demo account
    • Easy to use (mobile-friendly) platform
    • Industry-leading risk management tools
    • Trade sugar and hundreds of other markets
    • Your funds are safe – publicly listed company regulated by the UK’s Financial Conduct Authority and Cyprus’ Securities and Exchange Commission

    Start Trading at Plus500.com Important: Your capital is at risk. CFD services are suitable for experienced traders only.

    Further Reading

    Lawrence Pines is a Princeton University graduate with more than 25 years of experience as an equity and foreign exchange options trader for multinational banks and proprietary trading groups. Mr. Pines has traded on the NYSE, CBOE and Pacific Stock Exchange. In 2011, Mr. Pines started his own consulting firm through which he advises law firms and investment professionals on issues related to trading, and derivatives. Lawrence has served as an expert witness in a number of high profile trials in US Federal and international courts.
    Start Trading Today atPlus500.com