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October 20, 2015

Is Sugar a Sweet Trade to Make?

sugar tradingSugar is not a grain, or a meat commodity – it is regarded as a soft commodity in much the same way as lumber, cocoa, coffee, orange juice and cotton are. Sugar is primarily traded on the ICE exchange (Intercontinental Exchange) and it has the following ticker symbol: SB. However, sugar is also traded on other exchanges around the world, including the Zhengzou Commodity Exchange (CZCE), the National Commodity Exchange Limited (NCEL), the Brazilian Mercantile and Futures Exchange (BF&M), the National Commodities and Derivatives Exchange (NCDEX), and the Kansai Commodities Exchange (KEX).

Each contract size for sugar is 50 long tonnes or 112,000 pounds. Sugar is delivered in raw sugar cane with 96° of polarization. Sugar contracts are traded in the following months: January, March, May, July and October from Monday through Friday 2:30 am through 3:15 pm Eastern Standard Time. The price of sugar is quoted at $0.0001 cents per pound, and the tick size is 0.01. Traders must meet specific margin requirements to trade sugar as this determines how much outlay is needed for each contract size.

For example a hypothetical sugar futures contract could take the following format: SB15F@13.12 means that the Sugar Contract for 2015 January is trading at $0.1312 per pound. This is precisely the type of format that a sugar trader would purchase a contract. When you are ready to trade sugar contracts on the ICE, the margin requirement is 12%. In the preceding example, the contract size of 112,000 pounds of sugar would cost a trader $14,672. With a 12% margin upfront, the amount needed to make the trade is $1,760.64.

Understanding How Profits are generated with Sugar

For every $0.0001 move in the price of sugar, the total price move for the contract is $11.20. Profits in sugar contracts are easily determined by the difference between the exit price and the contract price. The result is then simply multiplied by $11.20. Presently, the price of sugar is $11.57. The price of sugar is near its 5 year low figure, since it was trading close to $35 in 2011. The price of sugar has consistently declined over the past five years. Prior to the 2011 sugar price surge, trading sugar was well beneath $30, and in fact between late 2006 and 2008 was hovering around the $10 range.

Sugar is primarily available in the form of honey, Maple syrup, sugar beet and sugar cane. Its distinctive characteristic is that it is sweet and this carbohydrate is an instant pick me up by being able to generate rapid energy for the user. The refined form of sugar is white sugar and it comes from sugar beets and sugar cane. Some 78% of global production in sugar comes from sugar cane. This is why it is imperative to follow news updates regarding weather phenomena that impact upon sugarcane production. Shortages of sugar cane lead to price rises in sugar, depending of course on demand and sugar inventories.

The world’s major producers of sugar include Brazil and India, followed by the European Union. What is particularly interesting about this particular commodity is that the majority of sugar is consumed in the country of its production. This is in stark contrast to many other agricultural commodities such as wheat, corn, soy beans, red meat etc. Many countries export the vast majority of their agricultural produce and soft commodities.

Determinants of the Sugar Price

Depending on which country or region we were talking about, demand for sugar will vary considerably. Western societies are moving away from sugar-saturated diets, in favour of sugar substituted diets. This trend is likely to continue as concerns grow about the impact of consuming too much sugar on the general health and well-being of society.

Sugar substitutes are now widely used across the US and Canada, with Europe close in tow. Some of the most pressing concerns with regards to sugar consumption are obesity, diabetes, tooth decay and the like. Even with declining preferences for sugar, the US remains a major consumer of world sugar.

The price of sugar is not free of market manipulation. In the US and many other countries, there are measures in place to protect producers by maintaining artificially high prices. This has the effect of causing consumers to look at alternatives. For example, many food companies are now turning to corn syrup as a substitute sugar. There are growing calls from sugar beet producers and sugar cane producers for a free-market system vis-a-vis sugar prices.

Of course an important determinant of the price of sugar is the quantity of sugar beets and sugar cane. As mentioned, the more abundant these commodities are, the lower the sugar price will be, all things being equal. Adverse weather has a detrimental effect on the production of these crops. Things like frost damage, excessive rains and flooding, droughts and other negative weather phenomena reduce the crop supply and raise the price of sugar on the markets.

It is clear that tariffs and subsidies are widely used to prop up the sugar markets around the world. Nobody knows quite what the real price of sugar should be, since there is so much artificial maintenance of market prices. In truth, the price of sugar may well be substantially less than what it presently is, but the clearest indicators yet of the price of sugar are likely found in things like export numbers, domestic consumption and society’s changing attitudes towards processed sugar.

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March 23, 2012

Risks To Be Aware Of In Commodity Investment

While everything is a gamble in investment, it helps if we are guided by good analysis and understanding of the risks involved so we can make informed decisions.   Commodity trading offers a lot of benefits not offered by conventional fund management, principally the possibility of large profits in a short time, but it pays to have the proper research and knowledge to succeed.  We have seen a continual rise in the goods that commodity investment has to offer for trading, but there are also risks that we should take into consideration.

Since commodities futures are highly leveraged investments small price changes can cause the loss of your entire investment and even create “Margin Calls” where you are required to add additional funds. When we are able to manage the risks, we can be assured of generating satisfactory returns. Below are some risks that we need to be careful of when investing in commodities.

Natural risks (Risks involving nature)

Since commodities are usually goods of the earth, such as wheat and corn, geographical risks will definitely affect the commodities that we are trading.  Any hurricane or bad weather changes can easily affect the supply of wheat and corn, consequently affecting its prices. Droughts can cause major changes but also plenty of rain which produces a bumper crop and lowers prices because of the larger supply.

Political Risks

One of the best examples of how political risks can make commodities fluctuate greatly  is oil.  Large supply of oil is found in the middle east and oil companies would need to handle the laws of the middle east countries that have jurisdiction over this natural resource. Many conflicts happen in oil producing nations which can send prices rapidly higher.

Speculation Risks

Commodities markets are not any different in some ways from stock markets, the market can also be populated with traders whose interests lie on speculation whether the prices will go up or down or longer term investors who have a stake in the products traded.  It is important to distinguish whether the market participants are truly commercial users or just plain speculators.

Fraud Risks

As with any other business transaction, there is the possibility of fraud.  There are institutions that are regulating the market to prevent or minimize fraud in commodities investment however there are still deceptive practices to be careful of and some of these may lay within legally accepted statutes.  To prevent fraud, it is important to research thoroughly on the company you are transacting with.  It helps to have more than enough information about the firm before you release your funds.  While you may never be assured that everything will be fraud-free, it pays to do your homework and maintain careful and complete documentation on all your trades and positions.

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