If you’re looking for a way to diversify your investments, you probably know that the commodity market can offer great opportunities if you know how to take advantage of it. While most traders focus on commonly traded commodities, such as oil, silver, and Gold, it might be a good idea to explore other (maybe less known) commodities. After our previous articles on orange juice and coffee, let’s focus on the sugar market in this post.
What is sugar trading?
If you’d like to be exposed to the sugar market to take advantage of its price swings, you’ll have to use a broker, which will allow you to access the financial markets, including the sugar market. From its trading platform, you’ll be able to buy and sell contracts on sugar, depending on your main scenario.
Market specifications
When you trade sugar through online platforms, you’ll mostly trade futures on sugar.
Among the most popular exchanges offering these types of financial products on sugar, you’ll find the Intercontinental Exchange (ICE) through the Sugar No. 11 contract, whose price is expressed in cents per pound in US Dollar (USD) for a contract size of 112,000 pounds.
The Sugar No. 11 contract serves as the primary global standard for trading raw sugar. This contract establishes the pricing mechanism for the physical delivery of raw cane sugar.
Most important sugar-producing countries
Approximately 80% of sugar production is derived from sugarcane, while the remaining 20% comes from sugar beets. When it comes to global sugar production, the largest producers, listed in descending order, are Brazil, India, Thailand, China, and the United States.
Trading hours
According to data from the ICE, the trading hours of the commodity are from 3:30 AM to 1:00 PM in New York, from 8:30 PM to 6:00 PM in London, and from 3:30 PM to 1:00 PM in Singapore.
If you’re trading sugar futures contracts on the CME Group, the trading hours of CME Globex are 5:00 p.m. - 4:00 p.m. Chicago Time/CT from Sunday to Friday.
State of the sugar market
Sugar plays a crucial role in the food and beverage industry, serving as a versatile ingredient that adds sweetness, enhances flavor, and extends the shelf life of products. Sugar's influence extends beyond the culinary realm. It finds applications in the production of medicinal products, cosmetic and personal care items, as well as in the industrial production of biofuels, ethanol, and diverse chemicals.
As explained in the 2023/24 Sugar: World Markets and Trade from the USDA, global sugar production is expected to increase by 10.6 million tons to reach 187.9 million tons. This growth will be primarily driven by higher production in Brazil and India, although there will be a decline in Russia. The rise in global consumption is projected to set a new record, fueled by expanding markets like India and Pakistan.
Exports are forecasted to be higher, with Brazil, India, and Thailand compensating for lower exports from Pakistan. However, stocks are anticipated to decrease in markets such as China, as they prioritize meeting domestic demand, and in India and Thailand to accommodate increased exports.
Why should you invest in sugar?
Depending on your profile, there are several advantages to trading sugar.
The first reason to buy sugar is often to be able to profit from a rather volatile commodity. As sugar is influenced by various factors, its prices can experience significant volatility over time, which can be great for short-term traders using techniques like scalping, day trading or news trading.
Investing in sugar is also a way to diversify your investments by adding commodities to your portfolio, as this method can help you better protect your trading funds and mitigate your overall risk across various asset classes or financial assets.
Investing in the sugar market presents opportunities for savvy investors seeking alternative ways to profit. One avenue is to capitalize on the increasing global population, which drives higher demand for food and beverages, including sugar-based products. As disposable incomes rise, urbanization expands, and dietary patterns change, sugar consumption in these markets is expected to grow. This expansion of the potential customer base provides an opportunity for investors to benefit from the increasing demand for sugar.
Technological advancements in sugar production and processing techniques offer another avenue for profit. These advancements enhance efficiency, reduce costs, and improve the overall quality of sugar. Companies at the forefront of these innovations stand to increase productivity and competitiveness in the market. Investors can consider investing in such companies to potentially gain from their technological edge.
Furthermore, the utilization of sugar-based feedstocks, such as sugarcane and sugar beet, for the production of biofuels and renewable energy sources like ethanol provides an additional opportunity. The focus on sustainable energy solutions opens up avenues for investors to tap into the growing demand for alternative fuels and renewable energy.
Investors can also explore the potential of new and innovative sugar-based products. Functional beverages, confectionery, and bakery items that cater to evolving consumer preferences create opportunities for market growth. These products drive demand for sugar in various forms and applications, and investors can consider investing in companies that specialize in the development and marketing of such innovative sugar-based products.
What affects the price of sugar?
Just like with any other market, you need to be aware of the factors that can influence the price of sugar if you want to take advantage of this market, so here are the factors that have the biggest impact on sugar prices:
- Weather conditions in the biggest sugar-producing countries, as they can influence crops and overall yields.
- Government policies and regulations (both domestic and international), such as trade policies, import/export restrictions, subsidies, and tariffs.
- Energy prices, as they can greatly impact the cost of sugar production and transportation.
- Market speculation and global sentiment, as they can both influence the mood of the market (especially over the short-term).
- Currency rate, as sugar is priced in American Dollars (USD), which means that any significant movement of the USD will influence the value of sugar for those holding foreign currencies. Currency exchanges of big producers such as Brazil can also impact sugar prices.
- Health-consciousness surrounding sugar, as more and more people have become concerned about the potential negative effects of excessive sugar intake on their overall health and well-being.
What are the risks of investing in sugar?
Trading in the sugar market involves significant volatility, which increases the risk of capital loss, especially when using leveraged or margin-based trading products.
The growing health-consciousness among consumers has led to a shift in dietary preferences, with an increasing demand for reduced-sugar or sugar-free alternatives due to concerns about the impact of high-sugar consumption on obesity and chronic diseases.
This shift has prompted the development and popularity of sugar-free and low-sugar products in the market, with manufacturers incorporating natural sweeteners or reducing sugar content.
Consumer preferences and public health initiatives aimed at reducing sugar consumption can have a long-term impact on the demand for sugar.
Additionally, sugar production poses environmental threats, including deforestation, water scarcity, soil erosion, greenhouse gas emissions, and inadequate waste management, which may impact future production yields.
How to invest in the sugar market
Depending on your trading preferences, style, strategy, goals and horizon, there are several ways you can get involved in the sugar market
- Futures - Financial agreements between two parties to buy/sell an asset at a predetermined price and date in the future.
- CFD (Contract for Difference) - Financial derivatives reflecting the price of the underlying asset, used by traders who agree to exchange with the broker the difference in price between the opening and the closing value of the contract.
- Options - Financial derivatives giving the buyer the right, but not the obligation, to buy (call option) or to sell (put option) an underlying asset at a predetermined price within a specific time period.
- Stocks - If you prefer, it is possible to buy shares of sugar companies that are involved in the production, processing, distribution, or sale of sugar or sugar-related products, such as the candy makers Tootsie Roll Industries (TR) and Hershey (HSY) or the sugar companie Suedzucker AG (SZU).
- ETF (Exchange-Traded Funds) - A type of investment fund traded on stock exchanges and designed to track the performance of a specific index, sector or asset. ETF are quite popular because they’re as easy to trade as stocks, as you just need to buy parts or shares of an ETF. There are only a few ETF allowing you to get exposure only to the price of sugar, such as the Teucrium Sugar Fund (CANE) or the WisdomTree Sugar ETF (SUGA), but you can find other ETF that will provide you with exposure to additional soft commodities.
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