Sugarcane is highly versatile—and resilient. Break it, crush it, beat it or grind it, sugarcane always produces sweet syrup. It can be chopped off, chewed upon and then discarded on rich subtropical soil, and it grows back right there. Sugarcane stalks serve as seeds, and on average, a cane field is replanted every six years.
Sugar is produced from two main sources: sugarcane and beets. Sugarcane was the first source of sugar, and today approximately 80% of the world’s sugar is still produced from sugarcane, while the remaining 20% comes from beets. It is also worth noting that the 10 largest sugar producing countries represent roughly 75% of the world sugar production, with Brazil and India combined producing 50%. And, the 10 largest sugar consuming countries represent roughly 65% of total world consumption, with India and the European Union composing about 35%.
Sugar pricing exhibits some distinctive pecuniary characteristics. Since the colonial days, global sugar trade has been influenced by constant government intervention, either via production subsidies to farmers, import restrictions, imposition of tariffs or trade blocs. As you can imagine, that undoubtedly has a significant impact on the market price of sugar. Even in this modern day of free markets, these subsidies are still in place. That’s because as much as 70% to 80% of all sugar produced is consumed in its country of origin.
That said, sugar is traded freely in a competitive marketplace. The most liquid exchange-traded instruments available to trade this commodity are futures and options. Sugar is traded on futures exchanges as either raw or white sugar futures. The refined, white sugar futures (No. 407) contract trades in the United Kingdom on Liffe (in units of USD/tonne) and the more liquid, raw sugar futures (No. 11) contract trades on the ICE U.S. Exchange (in units of cents per lb.) in the United States. There are a few exchange-traded funds/notes listed for sugar, but they have precious little liquidity.
Sugar presents a convincing investment theme, and the futures market attracts momentous trade activity to command the action of market participants, making sugar futures an ideal instrument for traders looking to make a sweet profit.
Broadly speaking, futures can be traded either outright or in the form of spreads.
When trading outright futures, the reward is high, but so is the risk. On the other hand, when trading a spread, because you are buying one contract and selling another in the same or related commodity, ideally you make more money on one contract than you lose on the other. Your profit potential is limited, but so is the relative risk.
Traders largely choose their strategy based on market prices/conditions, hedging/risk management needs, directional views, risk appetite, and sometimes they just have a preference for a particular trading style. For many, spread trading offers the most effective alternative.