By Jared Cummans
Many investors are already fully aware of the benefits that trading sugar futures can offer. These contracts feature relatively strong liquidity and also come attached with enticing volatility that allows for both big gains and big losses depending on how you play your cards. But for those who are interested in getting a better grip on the sugar industry and how to properly trade these futures, taking a look at the underlying price drivers of this soft commodity will provide a key insight into making the most informed trades. Below, we outline five of the most important factors impacting sugar prices today.
- Geopolitical Tensions: With the major sugar-producing nations being emerging markets, the supply of this sweet crop can be easily bottlenecked by the combustible political situations that often characterize these nations. Moreover, trade relations between countries can have a big impact on the cost of sugar. For those looking for a real world example of this phenomenon, just take a look at crude oil over the past few years. With tensions flaring up in the Middle East (which is home to the world's largest producers) crude prices have been violently swaying back and forth. Likewise, sugar can be especially volatile to news concerning Brazil and India, who are the two largest producers and among the top consumers.
- Don't Forget the BRIC: Sugar cane, which is the most prevalent form of the commodity, is produced all over the world, but only a select few nations produce in mass quantities. Brazil, India, and China are the three largest producers in the world, with Brazil's production roughly equaling the next 10 highest producers combined. As for Russia, it ranks among sugar beet output. Though not as popular as sugar cane, sugar beet still has a major impact on the commodity. When looking for trends in sugar, cane should garner the majority of your attention as it is the most prevalent form, though beet is still significant.
- Regulatory Environment: In order to protect sugar farmers in the U.S., the government imposes quotas that limit the amount of tariff-free sugar that many major users can import each year, except from Mexico. To the extent that current import quotas remain in place, there will be a floor on sugar prices that prevents them from falling too far. Also, subsidies that cover farmers in the "dump market" could have a major impact if the policies change. It is not uncommon to see government policies reflect a supply glut or stockpile, as policies often favor commodities in need and hurt those that are over saturated. Keep a close eye on sugar's presence in the major world markets, as it could lead to direct policy intervention from government agencies.
- Ethanol: With alternative energies becoming more popular, many may turn to sugar-based ethanol as a substitute for fossil fuels. In Brazil, a significant portion of sugar is used in ethanol production. To the extent that ethanol demand increases in the future, so too will the demand for sugar. While ethanol was once thought to have the power to displace gasoline, it seems that this idea is now rather far-fetched. It may be the case that ethanol use decreases in coming years or levels off, which will be important for sugar traders to keep an eye on.
- Health Concerns: There is obviously a fair amount of backlash against sugar as an edible commodity given its presence in a number of unhealthy foods. There are numerous diets that focus on avoiding sugar altogether and a number of reports citing its unhealthy nature and side effects. Some of these ideas are a bit blown out of proportion, as some sugars are actually good for you, but investors know all too well that the theory of logic rarely applies to market behavior. While it probably isn't anything that will sprout overnight, investors should keep a close eye on any kind of news involving overall health and sugar consumption and demand.
Disclosure: No positions at time of writing.