Sugar Commodity Trading, Ethanol Demand Fuels Higher Prices
At a time of rising global agricultural prices, what are the opportunities in sugar commodity trading for the trader or investor looking for exposure to commodities as an asset class?
In 1974 this soft commodity witnessed a price spike of over 60 cents a pound and another over of 40 cents a pound in 1981, at the end of the 1970’s commodity bull market.
How are the markets different today and what extra factors are present which may change the supply and demand dynamics of this interesting commodity?
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First, before we get into sugar commodity trading, let’s take a closer look at where sugar comes from, in what forms and at the new dynamic that promises to make a profound change to world sugar markets of the future.
Sugarcane and Beet
Sugar is produced in over 100 countries worldwide, with between 75-80% made from sugarcane, mainly in tropical and sub-tropical areas in the southern hemisphere.
A key factor in successful crop yields is rainfall, with an annual minimum of around 600 mm.
The other 20-25% comes from sugar beet which is better suited to more temperate climates, mainly in the northern hemisphere. The disadvantage of sugar beet sources compared to sugarcane is the higher production cost.
Apart from unusual and adverse weather conditions, another factor that can cause sugar prices on world commodity exchanges to rise is crop infestation by pests such as moths, sugarcane borer, termites and ants. From plantation to market
Sugar processing consists of milling and refining. Sugar mills, normally close to the growing area, break down the cane and mix it with water, leaving the solid residues for use as an energy source.
Cane liquid is processed into a concentrated syrup from which yellow brown crystals are formed. The sugar crystals from the milling process are further purified by forming a heavy syrup, followed by a separation of impurities by centrifuge and various chemical stages.
The top producing nations are Brazil, which is also the largest exporter in the world, India, China, the EU, USA and Australia.
One key factor which distorts world sugar markets is the subsidy regime in the US and Europe, which supports producers by giving them prices higher than the world price.
Sugar is used in a range of fruit and vegetable formulations, in the fermentation of bread, as a jam preservative and now increasingly as a source material for ethanol for alternative fuel.
Demand and Supply
Sugar prices surged between 2004 and 2006, doubling from around 9 cents per pound to 18 cents per pound.
Since the 2006 high, sugar prices have eased back towards 9 cents and at during summer of 2008 are around the 11 cents mark. This drop was caused by world producers responding to market signals, that is higher demand, by increasing production. Balance between supply (161 million tonnes (mt)) and demand (154 mt) was quite tight in 2006/7 and this situation is likely to remain or worsen going forward as demand is projected to grow in developing Asian nations, particularly China.
Sugar Demand
The growing influence of the BRIC (Brazil, Russia, India, China) countries will have an impact on sugar demand going forward.
India is the largest consumer in the world and it is growing its use of sugar for ethanol as an alternative fuel.
China is the world’s third largest consumer and producer, with its per capita sugar consumption increasing from a very low base of around 7kg per annum, according to Jim Rogers in his book “Hot Commodities”.
Just compare this with per capita consumption of 45kg per annum in the USA.
Brazil is the largest producer in the world and an understanding of this market is important as a part of your sugar commodity trading strategy.
Jim Rogers says that Brazil has planned its sugar strategy so that it will avoid a sugar glut by using the potential excess supply of its sugarcane crop to produce ethanol for bioethanol, an alternative fuel to petroleum-derived gasoline. The growing use of sugar to produce ethanol has arisen alongside increases in crude oil prices and a surge in demand for sugar in China.
So with the strong probability of high crude oil prices forecast for the foreseeable future coupled with growing demand , a huge supply side challenge has been laid down to producers, if higher sugar prices are to be avoided. Indeed a growing percentage of cars in Brazil now run on ethanol produced from sugar. The shift to this fuel can only accelerate if the world is to face permanently high oil prices. As well as exporting sugar, Brazil now also exports ethanol for use as alternative fuel to countries as diverse as Japan, USA and Sweden, according to Jim Rogers.
Wheat Corn Soybean Rice Coffee
Trading Sugar on World Commodity Markets
With access to your chosen commodity trading system and having taken advice from your professional financial adviser, you are ready to get on board the sugar commodity trading express.
Where can you trade sugar futures?
With the latest online trading platforms now available, it is possible to trade from almost anywhere in the world so long as you have good internet access to receive the latest commodity prices on your electronic trading platform.
#11 Raw sugar futures is the most heavily traded sugar futures contract in the world and is available to trade on the ICE US Futures platform. The ICE also offers the #16 Sugar futures contract from September 2008.
Alternatively, you can trade raw sugar futures on LIFFE CONNECT, which is the trading platform of LIFFE, part of the NYSE Euronext Group. It is also possible to trade white sugar Futures through LIFFE.
You could also consider following a soft commodity index using an ETF which may not involve talking a leveraged position as is the case with futures contracts.
With the growth in bio ethanol demand and sugar consumption in the BRIC economies, the prospects for sugar prices and sugarcommodity trading look very exciting in the months and years ahead.
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