By Noble Drakoln

Commercial sugar's origins date as far back as fourth-century India. While the Indians discovered a way to crystallize sugar, the Moors discovered a way to perfect it. With the development of sugar mills and refineries, sugar became a successful commodity in the Muslim world.

In the 14th century, the Moors brought sugar growth and production to the Iberian Peninsula, and plantations were set up throughout what is now known as Spain and Portugal. These regions inherited the legacy of sugar manufacturing once the Moorish empire was successfully driven out of the Iberian Peninsula by King Ferdinand and Queen Isabella of Spain. Eventually, Portugal successfully brought sugar to the New World, and by the 16th century there were more than 3,000 sugar mills throughout South America.

The refined table sugar we consider a staple was once so rare and expensive that it was referred to as "white gold." Sugar cane, which was the first source of sugar, is a perennial grass that is grown in tropical and subtropical areas (before the arrival of sugar cane, honey and fruit were the only common sweeteners). Later, the development of an alternative source of sugar was discovered: beets. The sugar derived from these two sources is 99.8% pure sucrose, which is a complex sugar composed of glucose and fructose. Today, sugar can be found throughout the world, with over 120 countries successfully producing it for domestic and international use. (From sugar beet to sugar cane, this sector is growing despite a lot of sour challenges. Find out more in Sugar: A Sweet Deal For Investors.)

A sample commodity futures contract for sugar is shown in the following table.

Sugar Contract Specifications
Ticker Symbol Open Outcry: SB (ICE)
Contract Size 112,000 pounds (50 long tons)
Deliverable Grades Raw centrifugal cane sugar based on 96 degrees average polarization
Contract Months Jan, March, May, July, Oct
Trading Hours Monday-Friday: 2:30am-3:15pm EST
Last Trading Day For March, May, July, and October: the last business day of the month preceding the delivery month. For January: the second business day before the 24th day of the prior calendar month.
Last Delivery Day Last business day of the contract month
Price Quote .0001 cents per pound = $11.20
Tick Size 0.01
Daily Price Limit
(Not applicable in electronic markets)
None

Understanding Sugar Contracts
Like every commodity, sugar has its own ticker symbol, contract value and margin requirements. To successfully trade a commodity, you must be aware of these key components and understand how to use them to calculate your potential profits and loss.

For instance, if you buy or sell a sugar futures contract, you will see a ticker tap handle that looks like this:

SB8F @ 11.85

This is just like saying "Sugar (SB) 2008 (8) January (F) at $.1185 per pound." (It is standard pricing convention to see the prices of futures such as copper, coffee, sugar and orange juice quoted in cents per pound. In this case, $11.85 is equal to $.1185 per pound.) A trader buys or sells a sugar contract according to this type of quotation.

Depending on the quoted price, the value of a commodities contract is based on the current price of the market multiplied by the actual value of the contract itself. In this instance, the sugar contract equals the equivalent of 112,000 pounds multiplied by our hypothetical price of $11.85, as in:

$.1185 x 112,000 pounds = $13,272

Commodities are traded based on margin, and the margin changes based on market volatility and the current face value of the contract. To trade a sugar contract on the Intercontinental Exchange (ICE) requires a margin of $1,540, which is approximately 12% of the face value.

Calculating a Change in Price
Because commodity contracts are customized, every price movement has its own distinct value. In a sugar contract, a .0001 cent move is equal to $11.20. When determining sugar profit and loss figures, you calculate the difference between the contract price and the exit price, and then multiply the result by $11.20. For example, if prices move from $11.85 to $13.10, you multiply the difference, which is $1.25, by $11.20 to yield a contract value change of $1,400.

- Buy Sell Total Value
Sugar Contract Price (.0001 cent move = $11.20) $0.1185 $.1310 $.0125 or $1,400

Sugar Exchanges
The futures contract for sugar is traded at the Intercontinental Exchange (ICE), Brazilian Mercantile and Futures Exchange (BF&M), Kansai Commodities Exchange (KEX), Multi Commodity Exchange (MCX), National Commodity Exchange Limited (NCEL), National Commodities and Derivatives Exchange (NCDEX) and Zhengzou Commodity (CZCE) Exchange.

Facts About Production
The process by which sugar is produced has changed little since the 14th century. The natural sugar that is stored in the cane stalk or beet root is separated from the rest of the plant material. For sugar cane, processing involves extracting the juice, creating and crystallizing a thick syrup, spinning the crystals to produce raw sugar, and sending the raw sugar to a refinery for final processing and packaging. Beet sugar processing normally is accomplished in one continuous process without the raw sugar stage.

Sugar appears in various forms, such as sugar cane, sugar beet, honey, maple syrup and more. Its unique property as a simple carbohydrate gives it the distinct ability to make taste buds interpret it as sweet. White sugar is a refined sugar that is derived from sugar cane and sugar beets, and is sold in many granule sizes ranging from coarse to superfine.

Sugar cane dominates as the world's primary source of sugar, covering 78% of the market, with sugar beets following in second place. Worldwide sugar production in 2006 and 2007 reached a record 161 million tons, with Brazil leading the way with 33 million tons, India a close second with 27 million tons and the European Union (EU) running a distant third with 16 million tons of sugar production.

The sugar industry is unique among various commodities because as much as 70-80% of all sugar produced is actually consumed in its country of origin. This has led to an international sugar marketplace rife with subsidies and unfair market pricing.

Factors That Influence Sugar Price
The price of sugar is influenced by the following factors:

  • The key health concerns of sugar consumption are diabetes, obesity and tooth decay. Industrialized nations have made it a priority to solve these health problems, and may require the continued substitution of sugar or its elimination altogether.
  • The European Union is the second largest sugar exporter in the world. Sugar is subsidized in many regions, including the EU, through production and high tariffs on imports. Any shift in policy could topple this disparate plan.
  • Weather plays a key factor for both sugar cane and sugar beets. Sugar cane thrives in warmer tropical climates, while sugar beets prefer cooler climates such as Japan. Although sugar beets are consistently used as an alternative source for sugar production, frost damage and the lack of processing capacity can play a significant role in determining their availability.
  • Like all sugar producing countries, the U.S. has a protectionist policy in place for sugar prices. While producers enjoy higher sugar prices, it forces consumers to look to alternatives, a situation that has led to a significant number of companies switching to corn syrup. A growing movement among sugar cane and sugar beet producers is demanding a free market for sugar production.
Conclusion
Sugar production is subsidized and tariffed all over the world. The real price of sugar is actually unknown. In a truly competitive trading environment, sugar prices might be significantly less. Subtle clues surrounding its export and consumption must be watched in order to determine the market's direction.

Next: Commodities: Conclusion »


comments powered by Disqus
Trading Center