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A complete guide to buying, selling and investing in sugar
Learn about sugar as a commodity, the factors driving prices and the different ways you can invest in it.
As with most commodities, there are a number of ways to invest in sugar, all with varying levels of risk.
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How to invest in sugar
1. Buy Sugar Futures
Futures are a legal agreement to buy or sell something, at a predetermined price, at a specified time in the future. The contracts are negotiated at futures exchanges, which act as a marketplace between buyers and sellers.
There are various exchanges that offer contracts on sugar including The New York Mercantile Exchange (NYMEX), which is part of the Chicago Mercantile Exchange (CME), and the Intercontinental Exchange (ICE).
A benchmark in the raw sugar trade, and the most common sugar contract, is Sugar No. 11. A futures contract for the physical delivery of raw cane sugar. Futures contracts are standardised, meaning one Sugar No.11 contract always represents 112,000 pounds of raw centrifugal cane sugar based on 96 degrees average polarisation.
- All futures contracts are standardised, eliminating concerns about the quality and quantity of the underlying commodity.
- Futures can be extremely volatile and are riskier than other investment options. You have to be right on the timing and price movement.
- Futures expire on a certain date. If you fail to exercise them prior to expiry they become worthless.
2. Buy Sugar Options on Futures
An options contract is an agreement between a buyer and seller that gives the purchaser of the option the right to buy or sell a particular asset at a later date at an agreed-upon price.
There are two main benefits to options. Firstly, you are limiting your loss. You cannot lose more than you paid for the option, excluding brokerage costs. So, if you are wrong on the move of the price of sugar, your loss is only what you paid for the option. Secondly, options are usually far less expensive than buying the futures contract outright.
The International Exchange (ICE) offers an options contract on sugar futures.
- Less risky than sugar futures.
- Usually much cheaper than futures.
- Options on futures have expiration dates.
3. Sugar ETFs
ETFs are another option worth considering. ETFs trade as shares on exchanges the same way that stocks do. They give access to a whole load of assets, without having to put all of your money into one or two firms. If you need to learn more, check out our guide to ETFs.
ETFs allow investors to minimise risk, while taking advantage of the performance and general popularity of a particular sector.
There are three popular ETFs that invest in Sugar No. 11 futures: iPath Dow jones-USB Sugar Total Return Sub-Index ETN, Teucrium Sugar Fund and iPath Pure Beta Sugar ETN.
- ETFs allow portfolio diversification and risk management.
- Lower costs than open-end mutual funds.
- By placing your money in an ETF, you are trusting your portfolio to a robo—adviser, meaning you relinquish some control over the split of assets.
4. Buy Shares of Sugar Companies
When it comes to sugar stocks and shares, there are two names to keep in mind: Imperial Sugar Company and Alexander & Baldwin (NYSE:ALEX)
- You can pick and choose a range of stocks and cash out when you want.
- A simple, accessible and versatile way to access the market.
- Can mean putting all your eggs in one basket.
What are the factors driving the price of sugar?
Sugar is a volatile commodity, meaning investing could come with substantial gains or losses, which is largely due to the number of factors that impact the price of sugar. These include:
- Global supply and demand: If farmers expect higher demand they plant more crops and when weaker demand is expected, they plant fewer crops. If global demand exceeds or falls short of sugar supplies, prices are affected accordingly.
- The Brazilian Real: Fluctuations in Brazil’s currency can majorly impact sugar prices. When the real is weak, Brazilian farmers produce more sugar for export to countries with strong currencies and greater purchasing power. When the real is strong, Brazilian farmers are more likely to sell in the local market. A weak real means greater supply on global markets and lower prices.
- Government Subsidies: Government subsidies and tariffs are used to protect local sugar producers. These distort the market, creating artificially high supply and depressing prices.
- The Weather: Poor weather conditions can affect crops and reduce supply.
- Health concerns: Health risks have left governments under pressure to take action against high obesity rates. This could mean sugar taxes or restrictions, leading to a decline in consumption and a fall in prices.
- Ethanol Demand: Sugar can be used to make ethanol, and ethanol competes with gasoline as a fuel source. Thus, a fall in oil prices could depress sugar demand for ethanol, while an increase in oil prices would mean higher demand for sugar.
How much is sugar worth
Frequently asked questions
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