From timid bear to raging bull in less than a year’s time
Sugar was trading close to 10 cents a pound last summer, with the world drowning in sugar, and crop prospects encouraging.
Now the heavy rains in important growing areas in Brazil have affected every stage of the sugar crop: the harvest has been forced to slow down; the cane cannot be crushed; and the boats are sitting idle, waiting to load. There are approximately two million metric tons of sugar waiting to be loaded, but as shipments are being suspended, the price is now trading close to 19 cents a pound. Add to that the rising demand for the product, and we have the makings of a bull market.
The Sugar No. 11 contract, traded on the ICE exchange, is the world benchmark contract for raw sugar trading. The contract prices the physical delivery of raw cane sugar. Though as AvaTrade customers we don’t actually take delivery of the underlying commodity, we must be aware that the price of sugar will be affected by the complexities of the sugar delivery process. It is one reason why AvaTrade rolls over the CFD contracts in a timely manner.
What affects the price of sugar?
Although the weather in Brazil plays a key factor for sugar cane prices, it’s not the only place the weather matters for sugar prices. There are substitutes for sugar cane such as sugar beets and corn syrup. Sugar cane thrives in warmer tropical climates, while sugar beets prefer cooler climates such as Russia. Although sugar beets are consistently used as an alternative source for sugar production, frost damage can play a significant role in determining their availability. Similarly for corn syrup, the weather in the corn crop growing areas of the midwestern United States is a significant factor. Since these are substitutes for sugar cane, the relative price of these sugar products help determine the absolute price of cane sugar.
Sugar is used in the production of ethanol. As a matter of fact, Brazil is the world’s largest sugar cane ethanol producer and a pioneer in using ethanol as a motor fuel. All gasoline sold in Brazil includes a blend of 18 to 27 percent ethanol. Therefore the price of gasoline, and its fluctuations, will have a strong impact on sugar prices.
All sugar producing countries, including the U.S., have protectionist policies in place for sugar prices. Changes in these policies have a big impact on sugar prices.
Like any free trading market we have the choice of going long, speculating on a rise in prices, or going short, speculating that the price will go down. Both the current fundamentals — strong demand and questionable supplies — together with a strong technical picture, make sugar an enticing purchase. It looks like a moonshot with the next target being 20 cents a pound. A traditional trader might take these signals to go long the sugar.
However, experienced traders know that the rains will eventually end and, just like the market eventually found a bottom at 10 cents a pound when the world was awash with sugar, so too now the market will eventually find a high, and will turn itself around when it is least expected to. An aggressive trader can look to sell short and consider buying it back at the 10-day low, 1640.
Whatever you choose to do, make sure your AvaTrade account is well funded, to protect your position from short term fluctuations.