Trading Sugar for Profit – ETF Market

Cane sugar is versatile – and resistant. Break it, crush it, beat it up or grind it, cane sugar always gives a sweet syrup. They can be cut up, chewed and then thrown into rich subtropical soil, and they will grow back there. Sugarcane stalks act as seeds and on average a field of sugarcane is planted every six years. How to trade sugar for profit?

sugar It is produced from two main sources: sugar cane and beets. Sugarcane was the number one source of sugar and today about 80% of the world’s sugar is still produced from sugarcane, with the remaining 20% ​​coming from beets. It should also be noted that the top 10 sugar-producing countries account for about 75% of the world’s sugar production Brazil And the in case Together they produce 50%. The top 10 sugar consuming countries account for about 65% of the total world consumption, with India and the European Union accounting for about 35%.

Sugar pricing has some distinct economic characteristics. Since colonial times, the global sugar trade has been affected by constant government intervention, either through production subsidies to farmers, import restrictions, tariffs or trade blocs. As you can imagine, it undoubtedly has a significant impact on the market price of sugar. Even in this modern age of free markets, these subsidies still exist. This is because up to 70% to 80% of the total sugar produced is consumed in the country of origin.

As I said, Sugar Trade them freely in a competitive market. The most liquid exchange-traded instruments available for trading in this commodity are futures and options. Sugar is traded on futures exchanges as either raw or white sugar futures contracts. refined, White Sugar Futures Contract (No. 407) trade in United kingdom On Liffe (in USD/tons) and the higher the liquidity, Raw Sugar Futures (No. 11) The contract is traded on the ICE US Exchange (in units) in cents per pound) in the United States. There are some listed sugar ETFs/certificates, but they have very little liquidity.

Sugar presents a compelling investment topic, and the futures market attracts significant business to guide the actions of market participants, making sugar futures an ideal tool for traders who want to make a good profit.

trade in sugar

In general, futures contracts can be traded either directly or in the form of spreads.

When trading futures, the reward is high, as is the risk. On the other hand, when you trade a spread, because you buy one contract and sell another in the same or an associated item, you tend to make more money on one contract than you lose in the other. Your profit potential is limited, but so is the relative risk.

Traders largely choose their strategy based on market prices/conditions, need for hedging/risk management, target opinions, risk appetite, and sometimes they only have one preference for a particular trading style. For many, spread trading offers the most effective option.

Spreads: timing matters

Let’s take a look at the short spread in the calendar. In this case, we short the short-term futures contract and extend the month deferred. With this position, we will profit when the spread widens (i.e. when the short-term futures contract goes down and the price of the futures contract increases with one month forward), and lose when the spread narrows.

In our attempt to determine the chances of calendar spread, we study “Sugar” (less). Historically, when sugar prices High, we note that futures contracts are trading at a lag; The first month is trading higher than the deferred month. On the contrary, when prices are low, futures contracts appear to be trading in contango; The month deferred at a higher price than the first month. In addition, the calendar spread between the first month and the delayed month shows the average long-term return.

Before we start trading, we should consider our conviction that the pattern will continue. Do we expect the gap to close or widen further? If our analysis indicates a strong average return signal, then, during the period of high prices, we can implement a profitable trading strategy by buying the first monthly contract and selling the forward contract. In this example, in a few days, we hope to get enough profit from this spread before the pendulum swings the other way.

buy dip

For the spread trader, sugar also provides another interesting opportunity. Due to the high correlation between white sugar futures and raw sugar, we can make a difference on premium versus refined over raw. We sell white and buy crude if we expect the spread to decrease, and vice versa if we expect the spread to widen.

A quick analysis of the charts indicates that this spread tends to gather in a narrow range, and when there is a change in the price regime of the underlying futures, the spread begins to gather narrowly in the new range.

Trading this spread can be deceptive because each of these futures contracts expire on different days, and the months of the available contracts do not always coincide (list white futures: March, May, August, October and December; list crude futures: March, May, July and October). From a liquidity perspective, the historical average daily volume and open interest rate on the first month white sugar contract is about one tenth of the crude futures contract.

An experienced trader knows that liquidity constraints will result in a wider bid spread, and slippage in the execution of both legs of spread trading can sometimes be difficult. Because profitable trading opportunities with this spread are few and far between, but when such an opportunity arises, you should take into consideration the above factors and change your position size accordingly.

target trade

From a technical perspective, we can look at the daily moving averages to determine the direction of sugar.

We used the 30 day moving average, the 50 day moving average and the 100 day moving average on the sugar chart. In mid-November 2012, the 30-day moving average was below the 50-day moving average, and the first-month futures prices had crossed below all three moving averages, which served as a strong technical indicator that a correction would occur in a downtrend .

From a fundamental perspective, subtle clues about sugar export and consumption, as well as weather patterns, must be carefully monitored to determine market direction. In this example, it was a good short deal to sell the first semester at the time.

seasonal style

Given that sugarcane is an agricultural commodity and is harvested at certain times of the year, let us analyze whether this sweet commodity adheres to the seasonal pattern and is suitable for expected market movements. Perhaps the sugar trader can make an educated play about the harvest seasons and make money from the trends of the season.

We know that Brazil is an important player in this raw material, so let’s focus on the largest producing region of the country – south-central Brazil. The main harvest season there runs from May to October, so it may be realistic to assume that prices usually fall around April/May and increase in the following months when the harvest season begins.

If we take the settlement prices of the contracts of the first month and the contract of the following month, we note that historically the seasonal trend is really inconsistent. Sometimes there is a trend behavior, while in other periods the prices are limited by the time interval. Concerns about reduced production (largely driven by weather, etc.) had given rise to a fashionable market. However, its effect can be counteracted by rising inventory and falling demand due to various aggregate factors. Having a smaller buffer between aggregate supply and demand can cause many traders to sit on the edge, and this paves the way for tight, time-bound prices.

From the perspective of a typical study, a sugar trader should also monitor the foreign exchange market. Sugar is priced in US dollars, so the Brazilian real / dollar exchange rate can affect the pricing dynamics.

Since sugarcane juice is used to produce both sugar and ethanol, when sugar prices are low in the market, it will be profitable for producers in Brazil to use sugarcane to produce ethanol instead of raw sugar. So an informed sugar retailer should also keep an eye on the valency of ethanol.

The ambiguity of the market often hides real business, but an intelligent player with a solid understanding of the fundamental mechanics of the markets will always look for and identify profitable trading opportunities in all market environments.

Leave a Reply

Your email address will not be published. Required fields are marked *