As the third most traded soft commodity after Soybean and Corn, Sugar is another market with plenty of liquidity and opportunities. Throughout this article, we’ll be taking a deep dive into all the fundamentals you should know about if you want to take up sugar trading.
Trading Sugar via Contracts for Difference (CFDs)
Before diving into the specifics of sugar, a solid understanding of how CFDs work and how they differ from buying futures contracts is required. These are some of the key features of trading sugar through a CFD:
- A CFD is a cash-settled derivative. This means you never physically buy, sell, or take delivery of sugar. You are speculating on a contract that is made to track the prices of sugar futures in major markets. Using CFDs thus allows you to speculate on prices without having to worry about rolling over a futures contract or undertaking physical delivery.
- CFDs allow you to use leverage, enabling you to use your capital more effectively. Using leverage wisely allows you to hold multiple positions without tying up all your capital in just one asset. It also allows you to size up positions and potentially make significant profit from intraday swings that would otherwise achieve only a small percentage gain. Leverage is a tool; when used wisely, it can increase potential returns, but if used without understanding, it will amplify the size of losses.
- Unlike a physical investment, holding a CFD position past the daily market close typically incurs an overnight financing charge (or 'swap fee'). This cost makes holding positions for long periods less profitable. Therefore, the strategies discussed below are suited more for short- to medium-term trades instead of longer-term investments.
Understanding Sugar Production
Cane vs. Beet
The sugar market is divided into two separate sources: sugarcane and sugar beet. This distinction is critical as it shapes the geographical risks that are involved.
| Source |
Global Share |
Climate & Sensitivity |
Key Growing Regions |
| Sugarcane |
≈80% |
Tropical/Subtropical: Requires abundant sunlight, high heat, and is highly sensitive to frost. |
Brazil, India, Thailand, China |
| Sugar Beet |
≈20% |
Temperate: Grows best in 15-21 degrees Celsius and is more robust against colder weather and frost. |
Russia, U.S., Germany, France |
How and where is sugar grown?
Sugarcane production is strongly concentrated among two major players: Brazil and India. Respectively, they produce 39% and 24% of the global supply. Within these countries, we then see that particular regions are responsible for the majority of the production.
In Brazil, São Paulo is responsible for 60% of total Brazilian production, which rises to 85% when including states like Goiás, Minas Gerais, and Mato Grosso do Sul. This means that 33% of (85% x 39%) of global production thus comes from the Center-South region of Brazil, meaning that even small, localized weather events can completely disrupt the supply chain.
In India, we see the same issue, with just one state (Uttar Pradesh) producing over half of the country’s total output.
Sugar Beet production, on the other hand, is less concentrated. While Russia is the leading producer, it on its own is responsible for just 17% of the total output. Outside of Russia, major producers are the U.S., Germany, France, Turkey, Poland, and Ukraine. While there certainly are still clusters where more production takes place and production is thus susceptible to local weather events, they are generally less concentrated and thus provide a lower geographical risk, especially when accounting for the fact that sugar beet is responsible for just 20% of total sugar production.
Sugar Fundamentals: The Supply Side
Private Storage Aid
In an attempt to protect the EU market from outside competitors, the European Commission can intervene and pay the costs of storing products for a certain period of time, with the goal of countering a short-term oversupply and thus a fall in prices.
In short, this measure, although limited in its scope, helps stabilize prices.
Climate Risk: ENSO
The El Niño Southern Oscillation (ENSO) is one of the biggest determining factors on sugar yield outcomes. Specifically, a moderate La Niña phase is associated with a favorable monsoon period in India, suggesting robust rainfall and potentially high cane yields. At the same time, this can bring a drier winter to the Center-South region in Brazil, which increases the sugar content inside the sugarcane.
On the other hand, other climate risks are specific to each region. In Brazil, the biggest risk is drought during the growth stage. In India, it’s a Monsoon failure resulting in deficient rainfall. And for the EU, it would be a cold autumn (harvest season) with heavy rain and frost.
The Ethanol Parity Model
When we think of sugar, the major use case that pops up in most people’s minds is the simple table sugar, which appears in almost everything we eat. However, sugarcane has an additional use case: the production of ethanol.
To produce ethanol, sugarcane is fermented and distilled, after which it becomes 'hydrous ethanol' (made of 95% ethanol and 5% water). The process is very similar to creating beer or wine and is a relatively low-energy-intensive production process. This hydrous ethanol is then used as E100 fuel, which powers Flex-Fuel Vehicles and is most commonly used in Brazil itself.
Alternatively, hydrous ethanol can be dehydrated into anhydrous ethanol (prefix ‘an-’ meaning without), which can then be mixed with gasoline for E5, E10, or E15 mixtures (the number shows what percentage of ethanol is used, while the remaining part is gasoline). These mixtures are the most popular in the U.S. and Europe, with newer cars being engineered to work on higher ethanol mixtures as they are cheaper and more environmentally friendly.
Brazilian sugarcane mills possess the option to immediately switch between exporting raw sugar and producing hydrous ethanol, mostly used for the domestic Flexible-Fuel Vehicle (FFV) market. Sugarcane mills are thus constantly evaluating the relative profitability of sugar versus ethanol.
This parity establishes a soft price floor for global sugar prices, since Brazilian sugar mills (which are responsible for 39% of sugarcane production) can seamlessly switch over to ethanol production, which tightens sugar supply and thus provides price support.
Leading Indicators and Cross-Asset Correlation
As we discussed in the last section, the profitability of ethanol production is a major price determinant for sugar. On top of the sugar prices, crude oil prices are thus a major factor in determining how profitable ethanol production is. Price increases in crude oil increase the competitiveness of ethanol, leading to more ethanol production and thus higher sugar prices due to lowered supply.
An additional leading indicator is the exchange rate between the Brazilian Real and US Dollar (BRLUSD). Since Brazil is mostly exporting its sugar to the U.S., the revenue it receives is priced in USD. Local production factors, however, are denominated in BRL, which means that a weakening BRL has two effects, both of which boost profitability for Brazilian farmers. On the one hand, the same amount of sales in USD is now worth more in their domestic currency, while on the other hand, their production costs are relatively cheaper when measured in USD. This creates a strong incentive for farmers to maximize their short- to medium-term output, which puts bearish pressure on prices.
The same BRLUSD link is seen in the coffee market. For those who might be interested in learning how to trade it, we highly recommend giving this article a read, as it’ll arm you with the necessary knowledge to start trading Coffee: