How to Trade Sugar Futures [Guide]
Once a luxury reserved solely for the wealthy, these days sugar is a staple in diets worldwide, so much so that in 2019, approximately 171.58 million metric tons of sugar were consumed globally, making it one of the most popular commodities in the world. It should, therefore, come as little surprise that it is also one of the most highly traded commodities in the world.
In this article, we will explain the mechanics of sugar futures, analyse what factors affect their price and show you how you can start trading sugar with Admiral Markets!
What Are Futures Contracts?
Before we look at what factors affect the price of sugar and how to trade sugar futures in more detail, it is worth quickly recapping what futures contracts are and how they work.
A futures contract is an agreement between two parties to exchange an underlying asset at a predetermined price on a fixed date in the future. Although futures contracts can be traded on a wide variety of different assets, they were originally developed for the commodity market as a form of hedging against adverse future movements in price.
These days, as well as still being used for hedging purposes, futures are widely used as a vehicle for trading and speculation. Futures contracts allow traders to speculate on the price of a particular commodity without having to take ownership of the physical underlying commodity itself, which would naturally present a range of logistical issues.
Futures are heavily regulated, the contracts are standardised, for quantity and quality, and they are bought and sold on futures exchanges.
Sugar Futures Explained
The first thing you will probably notice when looking at sugar futures is that there are two different types available to trade; raw sugar and white sugar.
Raw sugar is the product of a few simple processing steps applied to sugar cane juice. White sugar, on the other hand, can be either white beet sugar, cane crystal sugar or raw sugar which has been heavily processed.
As we mentioned earlier, futures contracts are standardised, which means that the size of the contracts are fixed.
The size of one contract of raw sugar is 112,000 lbs and they are quoted in USX (US cents) per lb.
The size of one contract of white sugar, however, is 50 metric tons and the contracts are priced in USD per metric ton.
What Affects the Price of Sugar?
As with the price of any asset traded on the free market, the price of sugar is determined by the balance of global supply and demand.
When trading agricultural, or soft, commodities, it is useful to understand the locations of where production takes place. This is because, if a large proportion of total global production takes place in one or a handful of countries, as is the case with sugar, events in these countries can have a large knock on effect on the commodity’s price.
In the 2019/2020 season, approximately 166.18 million metric tons of sugar were produced globally. In this same time period, out of over 120 countries which produce sugar worldwide, Brazil and India accounted for around 60 million metric tons or roughly 36% of total global production.
From these figures, we can deduce that any news which could lead to a disruption in the supply chain of either Brazil or India can have a significant impact on the global price of sugar.
In the next few sections, we will look at some of the individual factors which can influence supply and demand, and consequently price.
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Weather plays a very important role in the production of all soft commodities. Adverse weather conditions which hinder production can lead to a decrease in supply and push sugar prices higher. On the other hand, perfect weather conditions can lead to bumper crops which in turn will push prices down.
Given what we know about the high proportion of global supply taking place in just two countries, particular attention should be paid to what role weather is playing in both of these regions when trading sugar.
The issue of weather is particularly prevalent during monsoon season in India. Monsoon season is the main source of irrigation for a number of crops produced in the country, meaning that a poor monsoon season (i.e. one with less rainfall than normal) can negatively affect the growth of sugarcane, reducing India’s sugar production.
When there is a poor monsoon season, or when meteorologists predict a poor monsoon season, the sugar markets are usually quick to react as consumers and speculators alike anticipate a reduced crop and thus an upward movement in price.
Depicted: Admiral Markets MetaTrader 5 - Sugar.White Daily Chart. Date Range: 12 August 2014 - 22 December 2016. Date Captured: 25 February 2021. Past performance is not necessarily an indication of future performance.
In the chart above, we can see how sugar prices reacted following a poor monsoon season in 2015. The reduced rainfall that year led to a fall in Indian sugar production in 2016. White sugar prices went from trading at around $340 per metric ton in August 2015 to more than $600 in September 2016!
The consumption of sugar has been linked to many health problems; obesity, diabetes, heart disease to name a few. Particularly in developed countries, people have become more conscious of sugar’s role in these health issues which has led to more people attempting to reduce consumption.
Moreover, governments in some developed countries have been proactive in trying to change people’s behaviour when it comes to sugar consumption. For example, in 2018, the UK government introduced a tax on the producers of soft drinks which contained sugar above a certain threshold.
As more people become wary of the adverse impact sugar has on health, we could see a decline in global sugar consumption in the long term.
Crude Oil Prices and Demand For Ethanol
Although it may sound coincidental, the prices of crude oil and sugar have become increasingly positively correlated in recent years. However, coincidental it is not!
When we think of sugar, we instantly think of sweets, cake and fizzy drinks. However, it does actually have a variety of other uses, one of which is producing ethanol, a biofuel which can be used as an alternative to fossil fuels.
This means that when oil prices get too high, demand for substitutes, such as ethanol, tend to increase. This increase in demand for ethanol consequently increases demand for sugar which drives up the price. Of course, the opposite is also true.
The Value of the Brazilian Real
Brazil is responsible for a large proportion of the world’s sugar supply and fluctuations in its currency, the real, can have a major impact on sugar futures prices.
To understand why, it is helpful to know that as well as being the largest producer of sugar in the world, Brazil is also the second largest producer of ethanol. As we saw in the last section, one of the ways of producing ethanol is by using sugar and this is how Brazilian ethanol is produced.
Therefore, when the Brazilian real is weak, farmers have increased incentive to produce more sugar for export to countries with relatively stronger currencies. On the other hand, when the real is strong, Brazilian sugar producers are more inclined to sell sugar domestically to ethanol producers, thus reducing global supply.
How to Trade Sugar Futures CFDs With Admiral Markets
Whilst it is not possible to trade sugar futures contracts with Admiral Markets, you can trade Contracts For Difference (CFDs) on both sugar and sugar futures.
CFDs, like futures contracts, allow traders to attempt profit from both rising and falling prices of an underlying asset while benefiting from the use of leverage.
Sugar futures CFDs, therefore, allow traders to speculate on the price of sugar futures. Futures CFDs share the same expiration date as the underlying futures contract, however, there is no obligation to exchange the asset at the contract’s expiry.
Trading futures CFDs also means that traders are not burdened by the standardised contract size and can instead trade white sugar in increments of 10 metric tons and raw sugar in increments of 10,000 lbs.
In order to start trading sugar futures CFDs with Admiral Markets, follow these simple steps:
- Open a Trade.MT5 account with Admiral Markets
- Download MetaTrader 5 and log in using your account details
- Head to the ‘Market Watch’ tab on the left hand side of the screen and press Control + U to bring up a list of symbols available to trade, as shown below:
Depicted: Admiral Markets MetaTrader 5 - Symbols
- From the list on the left hand side, select ‘Commodity Futures CFDs’. Here you will find both white and raw sugar futures CFDs. Select the one you wish to trade and press ‘Show Symbol’
- Next, find the symbol in your Market Watch tab, right click on it and select ‘Chart Window’ to bring up a price chart
- From the price chart, you can place a trade by right clicking anywhere and selecting ‘Trading’ followed by ‘New Order’.
Depicted: Admiral Markets MetaTrader 5 - Sugar.Raw Futures CFD H1 Chart. Date Range: 23 July 2020 - 25 February 2021. Date Captured: 25 February 2021. Past performance is not necessarily an indication of future performance.
You should now be familiar with sugar futures, what can affect their price and how you can trade them via CFDs with Admiral Markets.
Trading commodities, such as sugar, can be a great way to diversify your portfolio, which is an important part of risk management.
Moreover, due to the popularity of sugar trading, there is an abundance of liquidity and prices can be highly volatile. Whilst the presence of volatility does increase the level of risk, it also presents increased opportunities to attempt to profit from both rising and falling prices.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.