How to Trade Sugar CFDs

Roberto Rivero Jan 31, 2024

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 tons¹ of sugar were consumed globally, making it one of the most popular and, consequently, one of the most traded commodities in the world.

In this article, we will look at trading sugar, examine what affects its price and explain how to trade sugar with Admiral Markets!

Trading Sugar – The Different Methods
What Affects the Price of Sugar?
How to Trade Sugar CFDs

Trading Sugar – The Different Methods

Before we look at what factors affect the price of sugar and how to trade sugar in more detail, let’s take a quick look at some of the different methods of trading sugar.

Of course, one could buy the physical commodity in the hope of selling it in the future for a higher price. However, this presents a number of logistical issues, not least of all transportation and storage. It also only allows sugar traders to potentially profit from increases in price, as opposed to being able to speculate on movements in both directions.

Therefore, as with most commodities, sugar trading takes place mainly by using derivative products. As the name suggests, derivative products derive their value from an underlying instrument and allow traders to speculate on the price of a commodity without ever taking ownership of or delivering the commodity in question.

In the following two sections, we will look at two of the most popular ways of trading sugar: sugar futures contracts and sugar CFD trading.

Trading Sugar Futures

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.

Futures can be used to hedge against adverse future movements in price, but are also widely used as vehicle for trading, allowing traders to speculate on future price movements without taking ownership of the underlying asset.

There are two different types of sugar futures contracts 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.

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.

As we can see, in both cases, the size of one sugar futures contract is large. Although futures contracts can be traded on margin, the large contract sizes may be enough to put off less experienced traders. Moreover, sugar futures have an expiry date, which makes them less ideal for longer term exposure.

Sugar CFD Trading

Contracts for Difference (CFDs) are an agreement between two parties to exchange the difference between the current price of an underlying asset and its price when the contract is closed.

Sugar CFD trading allows traders to speculate on both rising and falling prices, whilst also benefitting from easy access to leverage. However, leverage must be used with caution, as well as having the potential to magnify profit, it has the same potential to magnify losses when the market moves against you.

When it comes to sugar CFD trading, traders do not need to worry about expiry dates; however, you need to be aware of the swap fee, which is interest charged on positions left open overnight.

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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 2021/2022 season, approximately 181 million metric tons of sugar² were produced globally, with Brazil and India accounting for roughly 40% of this figure between them. It follows then, 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.

Weather

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: 1 April 2014 - 9 December 2016. Date Captured: 17 February 2023. Past performance is not a reliable indicator for future results.

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 drop in Indian sugar production in 2016, which led to white sugar prices soaring. After trading at around $340 per metric ton in August 2015, prices climbed to more than $600 in September 2016

Health Concerns

The consumption of sugar has been linked to many health problems; obesity, diabetes and 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

The prices of crude oil and sugar have become increasingly positively correlated in recent years. As well as crude oil prices affecting input costs such as transportation, in the case of sugar, there is also another factor to consider.

When we think of sugar, we instantly think of sweets, cake and fizzy drinks. However, sugar cane actually has 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 can result in more sugar cane being diverted to ethanol production, decreasing the supply of sugar and driving up price. Of course, the opposite is also true.

The Value of the Brazilian Real

As we have seen, 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 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 ethanol³. As we saw in the last section, one of the ways of producing ethanol is by using sugar cane 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.