How to trade sugar

Sugar trading basics

According to global researchers, the sugar market will be worth more than $52.9 billion by 2022.¹ Produced from sugarcane or sugar beets, it’s used for much more than just sweetening food stuffs – everything from skin products to fossil fuel alternatives. Due to its versatility, sugar has captured the attention of traders and investors all over the world. They often choose this market because of its size and volatile nature, which offers the opportunity to profit whether its price is rising or falling. Learn how you can get started with these sugar trading basics.

Top sugar-producing countries

The top sugar producers in the world are emerging markets such as Brazil, India and Thailand. Brazil alone is responsible for producing around 39 million tonnes – the same amount as the second and third-ranked countries combined. ²

What moves the price of sugar?

The price of sugar is moved by several factors that affect supply and demand. Essentially, if more people want to buy sugar than sell it, the price will rise because it is more sought-after (the ‘demand’ outstrips the ‘supply’). On the other hand, if supply is greater than demand, the price will fall.

The factors that have the biggest impact on sugar prices include:

1. Currency movements
2. Government funding
3. Weather changes
4. Health concerns
5. Ethanol demand

Currency movements

Sugar is priced in US dollars (USD), therefore any ups and downs in the currency will affect its international price. A weak dollar generally means that commodity prices drop, and the demand increases. If the dollar strengthens against other currencies, sugar becomes more expensive and demand decreases. And, because Brazil is the largest sugar producer in the world, fluctuations in the Brazilian real (R$) also affect the price.

Government funding

Tariffs that are in place to look after farmers and producers sometimes cause producers to make much more sugar than is needed in the market. Because growers are subsidised, supply increases drastically, which causes lower prices. If there is no government funding, supply will decrease.

Weather changes

Soft commodities like sugar are very sensitive to the climate. Sugar crops, much like coffee and cocoa crops, require plenty of sunshine and rainfall. Naturally, poor weather conditions have a troublesome effect on sugar supply.

Health concerns

In most developed countries, sugar has a reputation for causing various illnesses and ailments. Over the long term, a decline in sugar consumption due to fears linked to diabetes, heart disease and obesity may affect the future of sugar, leading to decreased demand and lower prices.

Ethanol demand

Sugar can be used to produce ethanol – a chemical compound that can be used as an alternative to fossil fuel. The demand for ethanol is on the increase, which could mean higher sugar prices in future.

Additionally, if you’re planning on trading shares of sugar-producing companies, it’s important to learn about the factors that affect share prices.Additionally, if you’re planning on trading shares of sugar-producing companies, it’s important to learn about the factors that affect share prices.

How to trade sugar

1. Choose a sugar asset to trade
2. Decide how you want to trade
3. Create your risk management strategy
4. Open and monitor your first trade

Choose a sugar asset to trade

Sugar is often traded using futures – contracts in which you agree to exchange a set amount of the underlying commodity at a set price on a set date. These contracts are traded on futures exchanges, such as the Intercontinental Exchange (ICE).

There are other ways that you can gain exposure to the sugar market. Your choice will depend on whether you want to own the physical assets or not. For example, you could decide to trade or invest in the shares of a sugar-producing company, such as Suedzucker. Its shares are heavily influenced by the price of the commodity, but can offer good value compared to trading sugar itself. Alternatively, you could use sugar exchange traded funds (ETFs).

Decide how you want to trade

You can trade sugar using a wide range of financial instruments, including futures, CFDs.

Futures are the most popular way of trading sugar if you want to invest in the physical commodity, offering high liquidity and volatility. For traders, the disadvantage of trading futures includes an expectation that the physical commodity will be delivered – which they don’t want. Therefore, it’s necessary to ensure rollover arrangements are in place.

CFD trading allows you to deal on changing prices of sugar futures and options, without buying or selling the contract. Both methods use leverage, which means you only have to put up a small margin to gain exposure to the full value of the trade. This can magnify your potential profit – but also your potential loss. And, as you won’t ever take ownership of the underlying asset, you can go long or short on its price.

Create your risk management strategy

All trading involves risk, especially if you’re trading using leverage, which is why you need a risk management strategy to protect against unnecessary losses. There are ways in which you can minimise your risk, which includes attaching stops to your positions. Stops will close your trade at a certain point if the market moves against you, to prevent you losing more than you’re prepared to.

Open and monitor your first trade

When you trade sugar with CFDs, you can speculate on both rising and falling markets. If you think the price will rise, you would open a position to ‘buy’ sugar, and if you think the price will decline, you open a position to ‘sell’. Your trading decision should be based on your analysis of the market and your trading strategy. After you have opened your position – attaching the appropriate stops and limits – it is important to monitor your position’s progress and to keep up to date with anything that could impact the price of sugar.

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Popular sugar trading strategies

Popular sugar trading strategies include trading range trading, breakout trading and fundamental trading. Your strategy should be based on your knowledge, preference and risk appetite.

Range trading strategy

In a range trading strategy, a trader will identify levels of support and resistance in an asset’s price movements and seek to buy at levels of support and sell at levels of resistance. Range strategies work best in markets with lots of price movements, where there is not any particular long-term trend.

Breakout trading strategy

Breakout trading involves trying to spot the early stages of a trend and opening a position during this period. This enables traders to capitalise on profits once the trend moves above a level of resistance or, alternatively, once it breaks below a support level. In the context of sugar trading, breakout traders will try to make a prediction about global supply for the upcoming year and open a position accordingly.

Fundamental trading strategy

Fundamental trading is a strategy in which traders depend heavily on the factors that affect levels of supply and demand. Fundamental traders will look at company-specific or region-specific events that could affect supply or demand for sugar at the particular point in time. They will then base a trade on their findings.

Sugar trading hours

_{*Hours are set by ICE and may vary. Hours will shift between March and November as the UK and US change to and from daylight savings on different days, while Singapore remains on Singapore Standard Time (UTC+8) all year round.}

Sugar trading in summary

• The sugar market will reportedly be worth more than $52.9 billion by 2022
• Sugar is a volatile market that offers the opportunity to make a profit on both rising and falling prices
• The top sugar producers in the world are Brazil, India, EU 28, China and Thailand
• The price of sugar is moved by factors such as currency movements, government funding and weather changes
• Sugar trading strategies include trading trending markets, consolidating markets
• and volatility
• Sugar trading hours are set by ICE and vary per region

Sources:

1. Markets and Markets, 2019
2. ISO, 2016